As Saudi Arabia increases oil output, what’s next for the global economy?

Oil prices took a nosedive with the price of Brent crude oil going down as much as 30 percent after Saudi Arabia's decision to ramp up production.

Brent crude is one of the two main benchmark prices for purchases of oil worldwide.

Oil prices have not been this low since 2016. Reuters reports that: “Brent [crude] futures are on track for their biggest daily decline since January 17, 1991, at the start of the first Gulf War.”

Compared to last Monday, when Brent crude oil was trading at $52.795, on Monday March 9 it was trading at $35.89. That means the price fell by 32 percent week on week.

The great decline in oil prices was sparked by the Saudi announcement on Saturday that it would increase output. Saudi Arabia lowered its export prices and promised increased output, after a meeting in Vienna on Friday failed to produce the desired agreement with Russia to rein in production.

The meeting in Austria included the 14 members of the Organization of the Petroleum Exporting Countries (OPEC) with Saudi Arabia as the de facto leader, as well as their allies in the so-called OPEC+ (with Russia at the helm).

Russia refused to cut down production at the meeting despite reduced demand due to the global coronavirus epidemic. Saudi Arabia and Russia couldn’t see eye to eye on cutting production by as much as 1.5 million barrels a day, the BBC reported.

In response to TRT World’s questions, John Bowlus, Editor-in-Chief at Energy Reporters, compared the current situation to the 1980s. He said that at the time, “Saudi Arabia was carrying the weight for OPEC by making huge production cuts while other members, most notably Iran, did not meet their agreed targets.”

Bowlus added that: “Russia has been doing the same [as Iran] since November 2016, when the agreement began. Russia only fully met its agreed cut levels during three months in 2019, when the Druzhba oil-export pipeline was contaminated. 

"Russia's cuts were small compared to its overall production level and so, much like the United States, was largely free-riding on OPEC's cuts. Its attachment to the organization had symbolic value, creating a veneer of unity.”

According to Bowlus, when seen in this light Russia's refusal to cut down production is “somewhat puzzling”. Yet Bowlus says “all politics is still local and I see its motives as twofold: (1) It wants to keep its own producers happy - remember, Russia's oil industry consists of private companies, who do not like being part of OPEC, even if the cuts were never huge - no other country in OPEC has private companies; and (2) it believes it can keep its global market share, which has held steady this decade, and perhaps even win market share given its greater geopolitical reach. It can, for example, offer good short-term deals to plenty of countries, especially those desperate as the global economy weakens amidst COVID-19.”

Bowlus believes that Russia is not motivated by a desire to undermine the United States: “Russia did not undertake this move out of some desire to hurt US shale producers. It took it for its own reasons."

As a comeback to Russia’s insistence on high output, Saudi Arabia has dramatically cut prices and promised an increase in production. In an opinion piece in Bloomberg, David Fickling calls the current standoff between Saudi Arabia, Russia and US shale oil producers ––who are competing with Saudis and Russians–– a “war of attrition”, pointing out that “the winner isn’t the force with overwhelming power, but the one with the greatest capacity to sustain damage.”

According to Fickling, Saudi appears to have an advantage thanks to low production costs. But to Fickling this is misleading measure as Saudi Arabian Oil Company’s (Aramco) overhead costs are higher than its competitors, because it’s “an institution almost indistinguishable from the Saudi state itself.”

Fickling then goes on to suggest that US producers are likely to be “the most vulnerable” in the near term. Yet according to Fickling, even with the US out of the picture, Saudi is in a tough spot. He concludes: “Should this turn into a prolonged fight, Moscow is unlikely to be the first player to fold.”

The lower price of Brent crude oil and natural gas may benefit energy-dependent countries such as Turkey. Bowlus reasons “The lower the price, the less Turkey pays for its oil, all of which is imported. The longer this lasts, the better [for importers].”

Bowlus foresees the global oil demand as likely to shrink for several months at least - “this makes Turkey's current market share more valuable to compete for. Russia and Saudi Arabia could even compete for a new direct, bilateral supply with Turkey that includes discounted prices."

Bowlus also believes that "Any new development of gas resources in the Mediterranean will not happen for some time. They already faced major headwinds, including political risk, the attractiveness of renewables, and, most importantly, the oversupplied gas market. Gas prices are already low and will fall further. Israel and Egypt, however, are already far enough along in many of their projects that these will continue.”

In the long run, Bowlus suggests, “Oil and gas are cyclical markets, and I feel fairly certain in saying that their projects will still pay off down the road. People still need electricity and heat - oil will be hit far harder than gas." 

Melis Alemdar contributed to this report