The Sagadril-1 An UAE Oil rig operates outside of Abu Dhabi on December 12th, 2014. Guilhem Vellut/Flickr Creative Commons

Russia-Saudi oil war rages on

Oil prices reached a historic price drop on March 8 as an outcome of the global coronavirus pandemic, leading to increased tensions in an ongoing oil war between Russian and Saudi Arabian oil producers. 


The two countries are part of the Organization of the Petroleum Exporting Countries (OPEC), which consists of 14 countries and was formed in 1960 to “co-ordinate and unify petroleum policies among Member Countries,” according to its website. 


As a response to the global pandemic, the demand for the energy has plummeted, with many countries placing travel restrictions on flights, as well as encouraging citizens to stay home as much as possible. The decreased demand includes China, which is the number one importer of crude oil, using approximately 10 million barrels a day according to CNN.  


To accommodate the decreased demand for oil, OPEC members met and discussed dropping the production of oil by approximately one million barrels a day to keep prices the same during the pandemic.


The agreement fell through when Russia objected to the idea of cutting oil supply. The combination of a decreased demand and a surplus in production resulted in Brent crude oil reaching a 17-year low below $25 a barrel, as well as a decrease in the income of oil producers, according to Al Jazeera.  


Russian officials have also criticized the production cut as a way to boost the less competitive U.S. shale industry.  


Approximately 80% of Saudi Arabia’s revenues are from crude oil, leading to speculation that the country will see economic hardship if it does not diversify its revenue soon. The Paris Climate Agreement pushed many countries to reduce their oil consumption out of environmental concern. 


According to Reuters, Saudi Arabia plans to boost its crude output above 10 million barrels per day in April from 9.7 million barrels per day in recent months. The flooding of the oil market could be disastrous for U.S. producers, as shale companies need costs to be more than $40 a barrel to cover the costs of production. 


Saudi oil company Aramco has the lowest production costs in the world, at approximately $2.8 a barrel. American shale oil, being much more expensive to produce, needs the cost of crude oil to be almost 14 times the cost of production to create a profit, according to Al Jazeera. The sudden price drop caused by the oil war has left American companies scrambling to reduce production and cut spending. 


In the last several years many American oil companies have switched to a controversial technique known as hydraulic fracturing. Many critics of fracking worry about its long term effects of contaminating groundwater. Fracking has increased U.S. oil output to approximately 13 million barrels per day, making it one of the world’s largest producers, along with Russia and Saudi Arabia. 


Some U.S. industry members have expressed skepticism about the U.S. taking part in OPEC’s decision to decrease production. 


“Our view is simple. Quotas are bad,” said Frank Macchiarola, senior vice president of policy, economics and regulatory affairs at the American Petroleum Institute. “They’ve been proven ineffective and harmful. There’s no reason during this time to try to imitate OPEC.”


Energy stock prices have also taken a hit, with ExxonMobil losing more than 12%, and Chevron shares falling more than 15%. 


The U.S. State Department released statements urging Saudi Arabia to not flood the market as retaliation against Russia. 


“The secretary stressed that as a leader of the G20 and an important energy leader, Saudi Arabia has a real opportunity to rise to the occasion and reassure global energy and financial markets when the world faces serious economic uncertainty,” the State Department stated. 


The chance of an agreement in the near future between the two countries looks bleak, as “there have been no contacts between Saudi Arabia and Russia energy ministers over any increase in the number of OPEC countries, nor any discussion of a joint agreement to balance oil markets,” according to an official from Saudi Arabia’s energy ministry.