Saudi Arabia is starting a reckless oil war with Russia — but the US is also a target

      Published on Sunday, 15 March , 2020      1252 Views     
Saudi Arabia is starting a reckless oil war with Russia — but the US is also a target

In a reckless move characteristic of his leadership, Saudi Crown Prince Mohammad Bin Salman, known as MBS, spurred an oil crisis this week that cratered financial markets and could devastate American oil producers.

After Saudi Arabia indicated it will massively ramp up oil production, oil prices experienced their biggest one day drop in three decades.

The Dow Jones Industrial Average also fell by 2,000 points, its biggest point drop ever.

The markets will recover from the initial shock, but the vibrant US oil industry might be irreparably harmed by an ostensible ally the US has gone to great lengths to appease.

The crisis was preceded by a joint Saudi-Russian initiative to shore up oil prices in the wake of the coronavirus. With China and other countries on lockdown, demand for oil fell sharply, even as producers worldwide continued to pump the same amount.

To prevent a price collapse, OPEC — led by Saudi Arabia — and Russia attempted to negotiate production cuts of nearly 1 million barrels per day (bpd).

Those talks fell apart this weekend after Russia refused a deal that would have seen it bear half of that reduction.

Instead of settling for the status quo and injecting stability into a system already grappling with worldwide economic and social upheaval, MBS chose to burn the house down.

Saudi Arabia announced a massive increase in crude oil production from 9.7 million bpd to 12.3 million, a record amount that would likely involve tapping into its stores. It also offered substantial discounts to buyers in Europe, Asia, and the US — a move intended to capture market share from competitors.

For its part, Russia doubled down and threatened to increase its own production, setting up a potentially lengthy slump in the oil markets.

Khurais oilfield, Saudi Arabia oil
A gas flare in the desert near the Khurais oilfield, about 99 miles from Riyadh. 
Ali Jarekji/Reuters

The Saudi move appears designed to punish Russia, but unspoken is the obvious target — the world’s largest oil producer, the US.

In the past six years, the shale oil revolution transformed the US from the world’s biggest oil importer to a net exporter. In the process, US producers captured market share from Saudi Arabia and Russia, the other oil superpowers.

Unlike those nations, where large, state-linked enterprises dominate the market, the US market is full of smaller firms that are burdened with debt and facing shrinking margins. Without government backing, they depend on fair market prices for survival.

Saudi Arabia already tried — and failed — to destroy shale oil once. In 2014 and 2015, the Kingdom engineered a crash in oil prices that caused widespread bankruptcies among US shale oil firms and destroyed thousands of good jobs, although the industry survived. MBS appears to be giving it another go, this time in the middle of a global crisis that is already threatening to depress worldwide energy demand for some time.

The US oil industry will no doubt survive, but many jobs could be lost in one of the few fields where Americans without a college degree can earn a six-figure income. Already, the White House is contemplating a rescue of the industry.

The Saudi-orchestrated crash is particularly galling coming from a nation to which the US has shown great deference. The US supported the Saudi war in Yemen with ammunition, refueling, and intelligence, even though that conflict is disconnected from US interests and Saudi Arabia’s humanitarian violations have tarnished America’s reputation.

The US also sold the Saudis weapons that ended up in the hands of Al-Qaeda-linked militias and overlooked the murder of Jamal Khashoggi, a Saudi dissident and US resident. Only five months ago, US troops, aircraft, and Patriot batteries were deployed to the Middle East to safeguard the Kingdom from Iran.


Category Business | 2020/03/15 latest update at 3:00 PM
Source : Business Insider | Photocredit : Google
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