Why Did Russia Start Oil Price War?

There are two theories, neither of them good.

The collapse of a deal between Russia and OPEC to prop up petroleum prices led the Saudis to ramp up production, sending global markets that were already reeling from the coronavirus pandemic into a tailspin.

One nefarious explanation was floated by Bloomberg reporters Ilya Arkhipov, Will Kennedy, Olga Tanas, and Grant Smith (“Putin Dumps MBS to Start a War on America’s Shale Oil Industry“):

The Kremlin had decided that propping up prices as the coronavirus ravaged energy demand would be a gift to the U.S. shale industry. The frackers had added millions of barrels of oil to the global market while Russian companies kept wells idle. Now it was time to squeeze the Americans.

[…]

For over three years, President Vladimir Putin had kept Russia inside the OPEC+ coalition, allying with Saudi Arabia and the other members of the Organization of Petroleum Exporting Countries to curb oil production and support prices. On top of helping Russia’s treasury – energy exports are the largest source of state revenue – the alliance brought foreign policy gains, creating a bond with Saudi Arabia’s new leader, Crown Prince Mohammed bin Salman.

But the OPEC+ deal also aided America’s shale industry and Russia was increasingly angry with the Trump administration’s willingness to employ energy as a political and economic tool. It was especially irked by the U.S.’s use of sanctions to prevent the completion of a pipeline linking Siberia’s gas fields with Germany, known as Nord Stream 2. The White House has also targeted the Venezuelan business of Russia’s state-oil producer Rosneft.

“The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2,” said Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank. “Of course, to upset Saudi Arabia could be a risky thing, but this is Russia’s strategy at the moment – flexible geometry of interests.”

This explanation strikes me as bizarre. World oil prices were already shaky, both because of the radical increase in production from shale that made the US—not Saudi Arabia or Russia—the world’s top exporter but especially the decreased demand from China and elsewhere caused by the coronavirus.

While Russia is apparently better positioned to absorb a short-term hit in oil prices than are the Saudis, both economies rise and fall with oil prices. Low prices hurts them both rather substantially. The US, meanwhile, has an incredibly diversified economy.

Secondarily, we’re in an election year. Moscow has made no secret that it prefers to keep Donald Trump in office. A weakened economy makes a Biden presidency more likely.

To be sure, a bad economy means more turmoil and perhaps less appetite for cooperation with our NATO allies against Russian expansionism. But it could backfire.

Vox’ Alex Ward put out a long explainer on “The Saudi Arabia-Russia oil war” yesterday afternoon and the experts he talked to are also skeptical.

They told me if smaller US companies go bust during this time, bigger American firms like ExxonMobil will just buy their assets. There will be more consolidation — fewer companies in the shale oil industry, perhaps — but America’s production won’t go away. Russia’s play, then, would be doomed to fail.

Which leads to the second and more convincing theory: that Russia decided to make a play for more power in the global oil market. It couldn’t do that by agreeing once in a while to cut production with the Saudis. After all, Russian firms still make money if those companies export in even at a time of low prices. The profit margin will be thinner, but they’ll still gain customers and some revenue.

“It’s all about regaining market share,” says [Emily] Meierding[, a Naval Postgraduate School expert on international oil cooperation], and both countries are now in a price and production war.

The problem is that Russia’s play and the Saudi response may end up hurting them both. Shares in their national oil companies — Rosneft and Saudi Aramco, respectively — have already dropped. And unlike in 2015-2016 during which China bought up a lot of oil during a period of low prices, there aren’t really any buyers like that to pick up the slack right now, as demand is dropping worldwide, Ellen Wald, an oil market expert at the Atlantic Council think tank in Washington, told me.

That makes Russia’s decision likely an ill-advised one. It’s going to lose revenue in its bid to compete with America while not necessarily gaining strength in the energy marketplace. Saudi Arabia is hoping that lowering prices, which also hurts its own bottom line, will get Moscow to realize that and start cooperating again.

Indeed, there seems no scenario in which this is a smart play by Russia.

FILED UNDER: Economics and Business, World Politics
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. OzarkHillbilly says:

    Boy, that Saudi Aramco IPO just looks better and better as an investment, doesn’t it?

    2
  2. Argon says:

    I’m not sure why dropping oil prices would be a bad thing for the world economy. The drop may reflect a decline in demand and be an indicator of general economic slowing, but the lower prices will tend to help the economy overall. Not great for domestic oil producers but the rest of the country will benefit from lower energy costs.

    On the other hand, countries like Russia that depend heavily on oil income will have issues.

    2
  3. Mister Bluster says:

    …there seems no scenario in which this is a smart play by Russia.

    Maybe we now live in Bizaro World and Putin is taking advice from…no…no…no…no…

    1
  4. Polimom says:

    Indeed, there seems no scenario in which this is a smart play by Russia.

    Seems like everybody’s shaking the bushes for a “smart” reason by Russia. Sometimes a rose is just a rose (or a pile of steaming… )

    This smacks of hissy-fit type Trumperism to me. And/or brinkmanship, which often overlaps but isn’t necessarily the same thing. Putin is digging in his heels and trying to get his way, and he’ll either cave in a couple of days to the Saudis, or crash the economy completely.

    1
  5. grumpy realist says:

    The problem is that the Russian economy depends mightily on selling gas, oil, and minerals. They’re an extraction economy. (A lot of the Russians with brains ended up leaving the country during one of the many waves of emigration and are now in places like EU or U.K. laboratories.)

    So this looks like a squabble between Saudi Arabia and Russia over who’s going to have a bigger chunk of the oil market, given that we’re undoubtedly going to see a global industrial slowdown due to the coronavirus.

    4
  6. Daryl and his brother Darryl says:

    Whatever Putin is up to…it is likely long-term strategery, of which we are currently only seeing one tactic. I promise you that this ploy has been fully gamed out, and is likely going according to plan.
    Putin didn’t just decide, one day on a whim, to turn Donald Trump into an Asset. He started that play, literally, decades ago. And in exchange for his efforts he now owns the President of the United States.
    I guarantee you this oil gambit is every bit as calculated, and every bit as nefarious.

    5
  7. Hal_10000 says:

    @Daryl and his brother Darryl:

    Whatever Putin is up to…it is likely long-term strategery, of which we are currently only seeing one tactic. I promise you that this ploy has been fully gamed out, and is likely going according to plan.

    You give Putin way too much credit. He’s not a tactical genius. He’s tanked the Russian economy and gotten their military involved in a couple of quagmires. His interference in foreign elections is more random and designed to stoke chao than bring about the leaders he wants. The oil thing is a perfect illustration. He’s having a hissy fit but hurting Trump’s election chances. That is, to me, what makes him dangerous. When it all blows up in his face, he may decided a full-on war is his best option.

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  8. gVOR08 says:

    First, there was some discussion yesterday as to whether Saudi Arabia’s break even price was like $10 a barrel or like$70. Maddow had an energy analyst on last night who made a distinction between “production” break even and “sovereign” break even. The first is what it sounds like, the second is the price needed for a petrostate to make it’s budget.

    Second, in answer to James headline, I have no idea. But it may well have to do with specific Russian concerns, like getting control of Ukraine’s energy or pushing back sanctions that are blocking Nord Stream 2. Stuff that is no concern to Saudi Arabia, little remarked in the US, and not at the forefront of oil econ analysis.

    As to Trump, the Russians likely feel that he was an unexpected stroke of luck, they’ve played it for what it’s worth and will continue to for another ten months, and they can accept he’s likely a lost cause. They’re not going to try to influence the US economy in a desperate attempt to support him. However, it costs them nothing to ratfrack online.

    4
  9. Kathy says:

    Those looking for a “smart” reason for Russia’s actions, consider things like the Ford Edsel, New Coke, Windows 8, Communism, etc., which were at one time or another thought a great idea by some very smart people.

    Or consider the Tetrarchy devised by Diocletian. It wasn’t a terrible idea, but it wouldn’t work without a true believer wielding the most power, who would also keep the others in line. And it’s not as though Diocletian lacked the example of the two Triumvirates a few centuries earlier.

    2
  10. Daryl and his brother Darryl says:
  11. Michael Reynolds says:

    @Hal_10000:
    I disagree that Putin’s election interference is all about chaos. I don’t think that aligns with the facts. He picked his boy, and he’s trying to do it again.

    But as to Putin not being a genius, I agree. He started a war to gain control of Crimea so that he could have a Black Sea naval base. . . that he already had under long-term lease. A naval base of no use to him unless the Turks decide to allow it past the Bosporus and barely of any use then. He launched a larger war against Ukraine for. . . why, exactly? Just to make sure that he’d remain under sanction? And he’s been dying to grab hold of Syria to which I can only say, OK, Vlad, it’s all yours.

    He’s an intelligence agent and a tactician, not a strategist. His greatest success – placing a compliant clown in the White House – could have gone very wrong, and, if the Democrats take back the White House, will cost him dearly. His problem is that he’s an economic pipsqueak picking fights with economic superpowers, he just doesn’t have the power to exploit the openings he’s created. He’s an international troll.

    11
  12. MarkedMan says:

    @gVOR08:

    The first is what it sounds like, the second is the price needed for a petrostate to make it’s budget.

    Thanks for that. I was wondering where the discrepancy was. It illustrates why this is complicated. As dependent on oil as they are, Russia is not a petrostate, with various other sources of revenue contributing to their coffers. But as far as I know, the Saudis have no other meaningful source of revenue. And while a dictatorship can cut back in all sorts of ways, they risk unrest.

    As an aside, I wonder if this is part of MBS’s long term plan in going after the Princes? After all, for the most part they are simply useless parasites that cost the kingdom many, many billions of dollars a year.

    2
  13. gVOR08 says:

    @MarkedMan: I don’t think MBS planned for the coronavirus. I’m wondering if he’s got his arrogant ass in a cleft stick.

  14. Tyrell says:

    @Argon: It is a good thing for the people. I filled up today for $1.86/gal. That is extra money, like a pay raise. Someone would have to sit down and explain to me why it is a bad thing.

    2
  15. Raoul says:

    Can someone explain if opposing Nord Stream 2 actually makes sense?

  16. gVOR08 says:

    Bend over, here it comes.

    White House officials are alarmed at the prospect that numerous shale companies, many of them deep in debt, could be driven out of business if the downturn in oil prices turns into a prolonged crisis for the industry. The federal assistance is likely to take the form of low-interest government loans to the shale companies, whose lines of credit to major financial institutions have been choked off, three people said.

    Trump and advisers have been taking calls since Monday from concerned energy sector allies, who have voiced concern and at times exasperation not only about oil prices, but also privately warning against the administration supporting any sweeping paid sick leave policy, according to a major GOP donor and a White House official familiar with the discussions. These people spoke on the condition of anonymity to candidly discuss private conversations.

    Hot and hard. As someone (me) said about GOPs a few days ago, we’re all gonna die of the plague, it’s time for a tax cut. Every lobbyist on K Street is probably at the WH or a congressional office right now making a case for how unfairly their client is being hurt by coronavirus and how their pain will ripple through the economy, and Trumpsky’s election prospects.

    3
  17. gVOR08 says:

    @Tyrell:

    Someone would have to sit down and explain to me why it is a bad thing.

    As @Argon: said,

    The drop may reflect a decline in demand and be an indicator of general economic slowing, but the lower prices will tend to help the economy overall.

    Oil prices are down because Chinese growth is likely zero or negative, Italy is likely highly negative, Japan was headed into recession before the corona virus. Think a global recession is going to skip us?

    Low gasoline prices are a good thing in themselves (except for the part about encouraging burning more carbon). But they are a symptom of something very bad.

    @Raoul: Nord Stream 2 was part of the sanctions response to Russia seizing Crimea and starting a war in Ukraine. Beyond that, the US, and some in Europe, don’t want a situation where Russia can threaten to cut off Western Europe’s energy supply.

    As an aside, Rachel Maddow’s new book, Blowout, provides a very readable account of the evolution of the oil industry, including how Russia desperately needs to frack, but to do so they need western capital and technology that got cut off by the Ukraine sanctions. Putin would do anything (short of pulling back from Ukraine) to lift the sanctions. He thought he had it knocked with Trumpsky and Rex Tillerson, but the guardrails held and the “deep state”, i.e. the career civil servants looking out for the country’s best interests, got congress to forestall it.

    3
  18. Tyrell says:

    @gVOR08: I don’t understand how these dropping gas prices could be bad. It sure beats $3 a gallon! I think there are some people who want the price to go back to that.
    Many remember the infamous gas “shortage” back in ‘73. We had long lines, rationing, and four day work and school weeks. Once the price doubled, there was plenty of gas. The biggest hoax ever pulled on the American people! “This country was awash with oil”
    Every time that the president or Congress threatened to investigate the big oil companies, the price went back down!

  19. DrDaveT says:

    @Tyrell:

    I don’t understand how these dropping gas prices could be bad.

    We know you don’t. It used to be cute.

    9
  20. Matt says:

    @Kathy: Windows 8 is an excellent operating system with superior performance ,capability, and back end design over windows 7. Those changes and improvements were included in windows 10 along with some tweaks and other changes. Windows 8 introduced many changes to the UI that made it’s way into windows 10 because they were extremely convenient for IT personal and power users in general. Litterly 99% of the complaints about windows 8 was over the metro interface which you could of disabled for a more classic windows 7 interface by clicking a simple check box. Personally I came to like the metro interface on my laptop as it was far more efficient for program organization and searching.

    Windows 8 showed that the majority of computer users are lazy idiots who are slaves of their habits. Granted I already knew this as I have worked for years in IT and I freelance repaired computers for decades. Windows 8 is superior in all ways (processes, security, performance) to windows 7. Windows 8 was basically windows 10 without all the spying and with an optional interface (metro)…

    THe edsel failed because Ford mega over hyped the car beyond any reasonable possibility so of course the car failed massively to live up to the hype.

    New Coke failed because of a relatively small group of people (some of who didn’t even drink coke) engaged in a massive campaign against the product. Seriously even the leader of this revolt freely admitted he didn’t drink coke. What coke and a lot of other companies learned was that brand, nostalgia, and habits mattered more than taste. That nostalgia and habits are well established in adults and can’t be changed over night. Had coke just rolled out the new formula without making a big deal about it things probably would of gone vastly better.

    As this post has established people suck and it only takes one of those terrible people to ruin communism.

    @Michael Reynolds: NAILED IT.. Putin is former KGB not some master strategist…

    3
  21. rachel says:

    @Tyrell:

    I don’t understand how these dropping gas prices could be bad.

    Here’s an analogy that occurred to me: You go to a wedding party. It’s a big do with lots of expensive and tasty food catered in: lobster, rare roast prime rib, caviar, those little spanakopites that are just just the right combination of creamy, crunchy, rich and salty, on and on… It’s all great and it’s all free to you! Sure, the parents of the bride had to pay a small fortune for it that they probably can’t afford, but it’s not your problem that they threw away the equivalent of a down payment for a modest house.

    12~48 hours later you discover that at least one person in the kitchen had norovirus.

    Right now you’re at the “gobbling down the goodies” stage, OK?

    3
  22. Jax says:

    @Tyrell: Every time gas goes down this low, high-paying energy sector jobs disappear. If you talked to any hand in the oil/gas patch hand here in Wyoming, they liked it when it was $5 a gallon.

    Choose your poison. I would consider the electric vehicles, since it doesn’t sound like you get out much or go long distances.

    2
  23. Kathy says:

    @Matt:

    I fought the rhetorical war to end Windows 8, and our side won. I don’t want to revisit it. So I’ll just say: Windows 8 Is Not a Desktop Operating System.

    3
  24. Gavin says:

    One sentence you say Russia did not like US sanctions to keep NordStream from being completed.. so what makes you think Putin wants Trump to be in office – since Trump initiated those sanctions? That’s right: he doesn’t want Trump, and the lack of money spent proves it. Russian money spent on Google in the 2016 election: Under 5 grand. Russian money spent on youtube in the 2016 election: Under 50 grand. Still waiting on proof that any individual actually switched their vote because of any Russian interference.. and of course we’ll never have that proof – it doesn’t exist because it didn’t happen.

    You do realize that every politician since Teddy Roosevelt who has said or proposed anything “Against The Establishment” has then been asserted to be a russian agent, right? This was the playbook against FDR, against Truman, etc.

    If Putin is so strong, why would he care who’s in the White House – because again if he’s so strong wouldn’t he just then be able to manipulate whoever?

    It’s the banks that are behind the highly indebted pumpers [and their subcontractors] in the Permian which will fail.. and there’s zero reason to think anyone would buy companies with all their financial numbers printed in red. US oil production will fall — because the more they pump the more they lose. This may not happen in 2020 even because many of those fracking companies have pretty big loan amounts outstanding that would fund their operating expenses for a while. But when those run dry, boy howdy our production will crater because 90+% of shale frackers are in the red.

    If Putin actually picked someone easy to manipulate, that person is Biden — a sundowning geriatric who can’t remember what state he’s in or who he’s supposed to support. And Biden used to be a great debater.. he smoked ’em in both VP debates.
    It’s sad to watch but it’s ridiculous — Biden didn’t just lose a step, he lost many.

    Biden will of course lose to Trump just like every establishment Democrat since before I was born in the mid-70’s. Big dog and Obama were both outsiders — the birtherism was in fact initiated as one of the many primary attacks from the HRC Pumas. Establishment democrats completely forgot how to win [if they ever knew or wanted to know] and have been perfect failures for 40 years now.

    1
  25. An Interested Party says:

    …what makes you think Putin wants Trump to be in office…

    Umm, Putin’s own words

    You do realize that every politician since Teddy Roosevelt who has said or proposed anything “Against The Establishment” has then been asserted to be a russian agent, right? This was the playbook against FDR, against Truman, etc.

    Other than Trump, do you know of any other American president who had private meetings with a Russian/Soviet leader without staff and note takers? No? Me neither…

    If Putin actually picked someone easy to manipulate, that person is Biden — a sundowning geriatric who can’t remember what state he’s in or who he’s supposed to support.

    Not really…unlike Trump, Biden isn’t particularly friendly with Putin, and if we want to talk about a geriatric who acts like he’s senile, look no further than Trump…at least Biden actually has a stuttering problem to explain the awkward way he speaks sometimes…what’s Trump’s excuse…

    Biden will of course lose to Trump just like every establishment Democrat since before I was born in the mid-70’s.

    This time is different, of course, because of the toxic person Biden will be running against…

    5
  26. Michael Reynolds says:

    @Gavin:
    Bernie’s voters did not show up. That’s all that’s happened. They did not show up. After all the talk of turnout and recapturing Obama to Trump voters, that did not happen. It didn’t even kind of happen, it decidedly did not happen.

    That’s not ‘the establishment’ talking, that’s voters. Voters who did come out in big numbers and high enthusiasm, but for Biden. You want to be angry at someone? Be angry at the Bernie Bros who made it so very easy to dislike Bernie. They (you?) were like a fifth column secretly helping anyone but Bernie.

    Ranting, canceling, attacking, piling on – turns out that’s not how you add supporters. Gosh, who knew? I mean aside from everyone who was not a Bernie Bro?

    6
  27. mattbernius says:

    @Michael Reynolds:

    Bernie’s voters did not show up. That’s all that’s happened. They did not show up.

    It’s slightly more complex than that. At least in Michigan, a lot did show up. Bill Kristol (yeah, I know) summed up the bigger problem for Sanders:

    In Michigan, Sanders only fell 20K short of his 2016 vote total (went from ~ 599K to ~ 577K). Biden increased Hillary’s 2016 vote from ~ 582K to ~ 839K. Some of that was increased turnout by Democrats. Some of it was independents, Republicans and ex-Republicans voting for Biden.— Bill Kristol (@BillKristol) March 11, 2020

    The big problem for Bernie is that he wasn’t able to grow his base — which had been his core promise from the beginning. And so when the broader party base actually showed up, everything fell apart.

    1
  28. The q says:

    Gavin, I will bet a months income you are/were a birther and not some HRC puma.

    Wouldn’t it be cathartic for you to just open your window and scream out as loud as you can “I hate that N word”. Come on, I know you are just dying to say it. It’s ok, trump is president and will protect you.

  29. Matt says:

    @Kathy: Windows 8 is very much a desktop OS. If you want a real example of a windows version that is “not a desktop operating system” then you need to take a look at Windows Phone a version of windows that really is not a desktop operating system. Prior to that would be Windows Mobile. Just because you hated metro but was too lazy to click the check box to disable it doesn’t mean it’s a non desktop OS. If you actually spent time looking into the kernal and all the nitty gritty stuff you wouldn’t be making such an ignorant claim. Windows 8 was a vastly upgraded version of windows 7. Windows 10 is windows 8 with tweaks and adjustments. The biggest changes were in the UI and the addition of cortana along with various spyware style background processes.

    BTW windows 10 works on tablets and phones so it is far closer to your claim than windows 8 ever was…
    |
    @Gavin:

    Russian money spent on Google in the 2016 election: Under 5 grand. Russian money spent on youtube in the 2016 election: Under 50 grand. Still waiting on proof that any individual actually switched their vote because of any Russian interference.. and of course we’ll never have that proof – it doesn’t exist because it didn’t happen.

    Well this is a first usually your type outright denies anything even happened. Now you’re putting out irrelevant numbers as “proof” or something. THe russians were relying on their army of bots to do what they did. They created social media accounts and groups galore and pushed memes/pictures with lies to ouright fabrications to influence the election. They started fights to try to fracture the cohesion of our society in the USA. You don’t have to pay facebook to create an anti-democratic group. You don’t have to pay facebook to post lies in discussions in an attempt to derail them. There’s a reason why companies pay influencers so much money. Because the majority of people are sheep who look to others for guidance..

    Trump is a thousand times worse than anything you said about Biden. IF you can’t see that by now then you’re just another sheep willfully blind because GO TEAM GO!!

    EDIT: I got to admit I still find it hilarious you listed Bill as an outsider lol…

    Obama went with the moderate Democratic flow so while he did kind of come from the outside he embraced the standards.

  30. Kathy says:

    @Matt:

    Windows 8 is very much a desktop OS.

    Ok, we’re going to do this, I guess.

    It’s not a desktop operating system.

    I didn’t just read about it, saw it on display, and recoiled saying “ewwww!!” No. I downloaded the Windows 8.1 “blue” preview and ran it on a laptop for a month.

    That was some years ago, so I don’t recall every detail of the experience. But I do remember the Modern (not Metro, BTW) interface intruding if I pressed the Windows key, as I usually have done dozens of times every day since Windows 95 came out. The effing charms bar came up almost every time I tried to close a window. Without a Start Menu, I had to pin tons of quick-launch icons to the lower right of the task bar, or have a lot of shortcuts on the desktop. Had I pinned “apps” to the task bar in compact form, as is the norm with the lazy and stupid who don’t even know what the other button on the mouse is for, I’d have been left with no room at all for any tasks on the task bar.

    I did warm up to the OS only when I installed Start8, which did disable the Modern interface and restored the Start Menu. I also installed Modern Mix, not to run any Modern apps, but to keep such apps from dragging me to the Modern (aka Useless) interface should I run one by mistake.

    I’ll give MS points for the active tiles. too bad few apps make any use of them.

    I wound up buying a Win8 laptop to replace my older one, but only because 1) Start8 was cheap, and 2) MS had already announced free upgrades to Windows 10 for all Win8 sufferers.

    The bottom line is simple: the interface should run the way I want it to, not the way Microsoft wishes.