Saudi Arabia, which has the world's largest oil fields, increased production after it failed to convince Russia to agree to cut production by 1.5 million barrels per day to stabilize world oil prices.
In connection with the cancellation of flights, ground transportation, and shutdown of production during the coronavirus pandemic, fuel consumption in the world decreased, and oil fell in price. The price of Brent crude oil fell from $ 69 to $ 50 per barrel from early January to March 6, but after the demarche of Saudi Arabia collapsed to $ 27.9 on March 24. Previous OPEC agreements to reduce production expire on April 1.
Saudi Arabia's New Oil Strategy
At first glance, it may not seem logical to increase oil production amid declining demand. The goal of Saudi Arabia is not to increase profits from oil sales, but to free markets from competitors. This version is confirmed by the opinion of those close to the royal court. Former Saudi government adviser Nawaf Obaid believes the OPEC + summit in Vienna marked the kingdom’s transition from partnership with Russia to a new long-term policy aimed at expanding its share of the global black gold market.
So decided the Crown Prince Mohammed bin Salman, in whose hands considerable power was concentrated. Under him, Saudi Arabia began to pursue a more decisive and offensive foreign policy, as evidenced by the provision of military assistance to the Yemeni government in the fight against Iran-oriented Houthi rebels, the international isolation of its regional rival Qatar (with help of the UAE, Egypt and several other Arab countries), the killing of one of the main critics of the Riyadh authorities - journalist Jamal Khashoggi.
The authorities of Saudi Arabia decided to take a chance this time. Recently, the situation on the sales markets is not in favor of the Arabians. America is no longer a gold mine. After Donald Trump came to power, the United States began to extract and export more oil than to buy abroad. From 2013 to 2018 oil supplies from Saudi Arabia to the United States fell from 1.32 million to 901 thousand barrels per day. In 2019, the kingdom's share of the US oil market was 6%, the same as Russia. Last year, the United States became the world's largest oil exporter (over 13 million barrels per day).
Russians are next to the Arabians in the Chinese market: in 2019, Russia's share was 15.3%, and that of Saudi Arabia - 16.8%. Amid the coronavirus pandemic, China has reduced its consumption of hydrocarbons. Russia dominates the EU oil market, and over the past three years, its share has increased from 30% to 39% in the Turkish market. The development of energy-saving technologies and green energy in the West is not in favor of oil suppliers. The share of renewable sources in energy production in Germany and Finland has exceeded 40%. In such circumstances, competing in the oil market has become more difficult.
Apparently, the Arabians have long considered the possibility of knocking out their competitors and have long been choosing the right moment. Saudi Arabian Energy Minister Abdulaziz bin Salman has ordered an increase in oil production from 12 to 13 million barrels per day over the next two years. According to Obaid, since 2012, Saudi Aramco has invested over $ 35 billion in modern oil production technologies, and now it has the opportunity to increase production from 1.5 to 2 billion barrels of oil per day.
It is planned to begin oil production even in the border neutral zone disputed with Kuwait. The coronavirus pandemic, to which the attention of the world elites directed, as well as the intransigence of Moscow played into the hands of Riyadh. Russia did not want to reduce oil production in the framework of OPEC +, as it was tired of US expansion in the oil markets of Europe and Asia.
The Kremlin's plans were to direct investments in the development of new Russian deposits. Everything looks as if the Saudi authorities decided to teach Russia a lesson for not wanting to follow the general rules of the game and at the same time satisfy their interests. It is not surprising why Russian Deputy Prime Minister Andrei Belousov accused the Arabians of disrupting the OPEC + deal.
The Arabians specifically provoked a crisis in the global oil market in order to weaken competitors and take control of new niches. Saudi Arabia has a number of competitive advantages that will mitigate the negative consequences for its oil and gas industry. According to Saudi Aramco Chairman Amin Nasser, Saudi Arabia has the lowest cost of oil production in the world - less than $ 9 per barrel.
Even in the face of a sharp drop in oil prices, the Arabians will still be able to make a profit, even in smaller volumes. Khalid al-Dabbah, Saudi Aramco's director of financial affairs, emphasized that shareholders are ready to drop oil prices below $ 30 per barrel. Obaid believes that Saudi Arabia will be able to cover all losses from the crisis through savings of $ 500 billion.
But competitors, which cost of oil production is more expensive (USA - over $ 23 per barrel, Russia - over $ 19 per barrel) will have to reduce oil production and free up niches in the world market for Saudi Arabia. The head of the Russian Tatneft oil company Nail Maganov said that an increase in oil production in April was allegedly unacceptable due to the influence of coronavirus on the world energy market (in fact, due to the demarche of Saudi Arabia). If oil companies from other countries increase oil production, they will sell it at a loss.
Oil crisis and Ukraine
For Ukraine, the crisis in the global oil market has dual consequences. Since we import most of the consumed oil and oil products, as well as natural gas, price reduction is beneficial. In 2015-2019 Ukraine increased oil imports from 227.7 to 790.6 thousand tons. During this period, diesel fuel consumption increased from 5.45 to 6.83 million tons per year, liquefied hydrocarbons - 890 thousand to 1.82 million tons. The benefits of lowering gas and diesel prices will go to the population, transport companies and agricultural enterprises that fuel their equipment.
Ukrainian analyst Oleksandr Martynenko does not believe that there will be a significant reduction in fuel prices, because, in addition to the price of oil, they are affected by excise taxes and markups of dealers. In his opinion, a reduction in the income of oil exporters will entail a reduction in the prices of iron ore and steel that Ukraine sells abroad. Amid the crisis and the coronavirus pandemic, projects in the field of construction, engineering, where metal is used, are frozen in different countries.
Lower prices for oil and petroleum products are not beneficial for certain types of Ukrainian business, especially in the lockdown. From 2013 to 2019 gasoline consumption in Ukraine decreased from 3.47 to 1.85 million tons. The prospect for oil product importers, owners of oil depots and over 9 000 gas stations and 2 000 gas stations is not the best.
Galnaftogaz company controls about 19% of the market of gas stations in Ukraine. Most gas stations are owned by the AVIAS, ANP, SENTOSA of Igor Kolomoisky and Gennady Bogolyubov. In recent years, new gas stations grew in Ukraine, with opened cafes and mini-markets.
An unpleasant surprise was the decline in world oil prices for Ukrainian oil companies like Ukrnafta, Naftegazvydobuvannia or Boryslav. Ukraine has a high cost of oil production compared to Saudi Arabia. In 2015, production costs for a barrel of oil in Ukraine was less than $ 20, but including taxes and rents, reached $ 45.
The cooperation of Ukraine with Belarus in the field of oil transit this year is in question. In February, the Belneftekhim concern was exploring the possibility of importing Azerbaijani oil using the Odesa-Brody Ukrainian pipeline.
In March, Odesa hosted oil tankers from Azerbaijan. The search of Belarus for alternative ways of importing energy was facilitated by disagreements between Presidents Alexander Lukashenko and Vladimir Putin over oil prices. Amid falling global prices for black gold and China’s refusal to buy Russian oil, Moscow turned to Minsk and agreed to compensate for the tax maneuver.
This measure provided for the gradual abolition of export duties on oil with an increase in the tax on its production in the Russian Federation. This was not beneficial for Belarus, since it bought Russian oil without duties in the conditions of the Eurasian Economic Union. It is unlikely that Belarus will increase oil imports in the conditions of its excess and lower prices for oil products from local enterprises.
The current oil crisis is compared with the events in the middle of 80s, when Saudi Arabia sharply increased production and so collapsed the world oil prices, which was one of the reasons for the collapse of the USSR in 1991. The Soviet Union, like modern Russia, replenished the treasury by exporting energy. Co-owner of the Lukoil oil company Leonid Fedun believes that Russian Urals oil may fall in price to $ 15 per barrel and not only Russia but also Saudi Arabia will suffer from the crisis.
In his opinion, the United States will benefit, because citizens' incomes will increase by 6%, despite the blow to the oil industry. Not everything is so simple. The situation is similar, but theories about the conspiracy of the USA and Saudi Arabia against Russia do not correspond to modern realities. If in the 80s the reduction in oil prices was economically profitable for the United States (there was a ban on oil exports), and the country imported it in large volumes, then after the discovery of shale oil production technology and the resumption of oil export from 2015, reduced world oil prices will not be beneficial to the USA.
The owner of the Oval Office emphasized that the decline in oil prices will lead to negative consequences for the industry. The oil crisis is a challenge for Trump on the eve of the presidential election, since American oil workers are one of his constituency groups. Exxon Mobil has reduced sales by 20% since the crisis began, and Chevron - by 12%. The US government even agreed to purchase oil for strategic reserves from US companies to support them in times of crisis.
Due to the oil crisis, relations between the US and Russia will not become more constructive. Russian companies are competitors for Americans in the global oil market. The head of Rosneft, Igor Sechin, claims that due to lower prices, expensive shale oil from the United States will leave the market.
US oil companies are demanding that the White House intervene in the crisis, but is against the introduction of any quotas to limit production. In such circumstances, Washington has two options for overcoming the situation: either subsidize oil companies in times of crisis, or oust Russia from the oil market by imposing sanctions and prohibiting other countries from buying Russian oil. It is necessary to achieve a reduction in oil production in the world.
There are a lot of reasons for new restrictive measures against the Russian Federation, starting from the ongoing aggression in eastern Ukraine, the bombing of civilians in the Syrian province of Idlib, ending with an unwillingness to reduce oil production. It is not profitable for Americans to put pressure on Saudi Arabia for political reasons, since it is their regional ally in the Middle East in the confrontation with Iran.
Lower world oil prices, a coronavirus pandemic, and sanctions will help to save less money in the Russian treasury, worsen living standards in Russia, and cut government pensions and social security benefits. Russia will have to deplete its reserves in the amount of over $ 400 billion to stay afloat.