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Saudi Arabia’s Oil Price War Is Backfiring

Saudi Arabia and Russia must have anticipated an oil price crash when they broke up their three-year-long bromance to push up oil prices.    Two weeks later and nearly 4 million bpd of total promised additional oil supply to the market next month, and Riyadh and Moscow are now counting the cost and trying to adjust government spending. The friends-turned-foes expect sharp drops in oil revenues in the near term, not only because Brent Crude is barely managing to cling to the $30 mark these days, but also because the coronavirus pandemic is leading to huge demand destruction.  

Saudi Arabia announced this week that it is reducing government expenditures by US$13.2 billion (50 billion Saudi riyals), or nearly 5 percent of its budget spending for 2020 after the government approved “a partial reduction in some items with the least social and economic impact.” 

These measures were approved “in light of the noticeable development in the public finance management, and the existence of the appropriate flexibility to take measures in the face of emergency shocks with a high level of efficiency,” says Saudi Minister of Finance and Acting Minister of Economy and Planning, Mohammad Al-Jadaan, the official Saudi Press Agency reported. 

The Kingdom “has taken measures to reduce the impact of low prices of oil, and additional measures will be taken to deal with the expected drop in prices,” Saudi Arabia says, nothing that additional expenditures could be re-evaluated and potentially cut.  

Related: The Reason Why Russia Refused To Cut Oil Production Even before the collapse of the OPEC+ talks, Saudi Arabia’s finance ministry had asked government agencies to propose a 20-30 percent cut in their budgets due to the oil price slide, Reuters reported last week, citing four sources with knowledge of the plans.  

It looks like Saudi Arabia bets on tapping cash from its sovereign wealth fund to patch up government finances with oil prices three times lower than their break-even oil price. 

According to Fitch Ratings, Saudi Arabia needs oil prices at $91 a barrel in 2020 to balance its budget, all else being equal. 

“For countries in the Gulf Cooperation Council (GCC), we estimate that a change of USD10 in the price per barrel of oil tends to affect government revenues by 2%-4% of GDP,” Fitch said last week. The rating agency’s statement came a day after oil prices crashed by 25 percent as Saudi Arabia – a GCC member, OPEC’s top producer, and the world’s top oil exporter – vowed to significantly boost supply and slashed the price for its oil in a dramatic shift in its oil price-fixing policies of the past three years. 

The Kingdom is signaling that it can adapt to today's lower oil prices, but analysts are not buying this claim. 

At $30 a Brent barrel, the Saudi wealth fund will deplete fast and reduced government spending will stall projects, and the already suffering private non-oil sector will suffer further. That’s the near-term damage. 

The longer-term damage is the lack of funds for the ambitious Vision 2030 plan of Saudi Crown Prince Mohammad bin Salman, which was already going downhill even before the oil price collapse as the promised multibillion foreign investment and Saudi investment in “diversifying away from oil” weren’t exactly flowing to the Kingdom. 

“I think we are beginning to see that the vision 2030 is not going well,”   Jean-François Seznec, Non-Resident Senior Fellow at Atlantic Council, said on an Atlantic Council press call last week. 

There is a growing amount of tension among the population, even among the crown prince’s main supporters, Seznec said. 

“But he needs to make a big impact. Now, his big impact is to force the Russians to give up and agree to the cuts, and if at the same time it destroys the U.S. shale industry so much the better,” Seznec noted. 

Related: Big Oil Prepares To Suffer In 2020

The Russians are also bracing for an oil price war, promising up to a 500,000 bpd production increase and assuring the market they have enough resources to cover budget shortfalls at $25-30 oil for six to ten years.   

The coronavirus pandemic and the lower economic activity, coupled with oil prices half the level before Russia and Saudi Arabia broke up the OPEC+ pact, will weigh on Russia’s revenues and budget, too. 

Russia’s revenues from oil and gas will be US$39.5 billion (3 trillion rubles) lower than planned, Russian Finance Minister Anton Siluanov said this week, adding that Moscow now expects a budget deficit. 

Analysts argue that Russia is in a better fiscal, financial, and political leadership position than Saudi Arabia to win the oil price war

Yet, there will undoubtedly be economic pain for both sides in this war, which is already claiming the first collateral victims—U.S. shale, Canada’s oil industry, and the UK’s offshore oil and gas sector. 

It’s now a game between Saudi Arabia and Russia of who will blink first, and in this game, the Saudis seem to have overestimated their fiscal buffers and underestimated the coronavirus-hit enormous demand destruction. 

By Tsvetana Paraskova for Oilprice.com   

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Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.  More

Comments

  • Justin Woolf - 22nd Mar 2020 at 1:07pm:
    Why do we assume that Russia and Saudi are in a price “war.” Its more likely this is a planned approach by the two countries. Their performance at the last OPEC+ meeting wasn’t so convincing to me. They’ve always wanted the shale industry to regulate their output and it seems they are getting close to achieving this goal. We should be very weary of joining an OPEC++ union.
  • Mamdouh Salameh - 22nd Mar 2020 at 1:32pm:
    In 2014 Saudi Arabia’s former oil minister Ali Al Naimi overestimated his country’s crude oil production capacity and its financial resources when he flooded the global oil market with oil and ended up inflicting the heaviest damage on his country’s economy among all oil-producing countries of the world.

    Saudi Crown Prince Mohammed bin Salman’s advisers advised him to start a price war against Russia and flood the global oil market with oil having learned nothing from the 2014 debacle.

    However, this time Saudi Arabia’s mistake is far bigger than in 2014 for three reasons. The first is that it can never win a price war with Russia. Russia’s economy is able to live for years with an oil price of $25 a barrel compared with the latest estimate of $91 for Saudi Arabia’s. Moreover, Russia’s economy is one of the world’s most advanced economies and very diversified one compared with Saudi Arabia’s overwhelmingly dependent on the oil revenues.

    The second reason is that Saudi Arabia doesn’t have the spare production capacity to flood the global oil market. Even in 2014 when their former oil minister Ali Al Naimi was boasting a production capacity of 12.5 million barrels a day (mbd), Saudi Arabia was only able to add 480,000 barrels a day (b/d) and 750,000 b/d to the global oil supplies in 2015 and 2016 respectively. The simple and plain truth is that the Saudis never had any spare production capacity then and they don’t have it now.

    The third reason is that by starting an oil price war with Russia, Prince Mohammed bin Salman chose the wrong enemy. By facing President Putin, the world’s most astute statesman and strategist, the outcome of the price war is already decided.

    The fact that Saudi Arabia announced this week that it is reducing government expenditures by US$133 bn, equivalent to the entire Saudi oil revenue in 2020 based on an oil price of $50 a barrel, speaks volumes about the inevitable damage to the Saudi economy.

    If Saudi Arabia continues with its price war, it will end depleting both its sovereign wealth fund and its stored oil not to mention ending with the bankruptcy of its economy and the destabilization of the country.

    Saudi Arabia will end up being the biggest loser with the US shale oil industry the largest collateral victim.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Ex Nihilo - 22nd Mar 2020 at 3:32pm:
    US oil and gas is ruined right now. Thanks to these fools and the MSM's constant Corona virus panic propaganda.
    It's insane. And now..
    Ther consumer can't even reap the rewards.. because the insane press. Can't help themselves with their disgusting Trump derangement syndrome. Commies love our lib infested MSM.
  • Bob Dobolina - 22nd Mar 2020 at 8:10pm:
    Russia is likely overstating their financial position.

    Decades of weak leadership have left Russia vulnerable to lose this price war.

    It is too bad for the Russian people, I am sure some of them are decent.

    Their economy is going to go down in flames, and probably a lot of civil unrest as the new regime replaces Putin.
  • el Cee - 22nd Mar 2020 at 11:41pm:
    Maybe the KING will be under pressure from Russia to remove the bumbling prince, Perhaps the prince will have to sell his oil painting and french chateau to fund "his" people.

    Its clear, the prince, like trumpo, is ill equipped to manage a country and international partners.

    Or maybe he just kidnaps more of his relatives and extorts more money out of them.

    Seriously, I do not understand why Saudi was first wanting cuts - when they didn"t get them, they were quick to attack Russia.

    All the while, conveniently ignoring US frackers increasing supply while taking advantage of prices that were being set but reduced production from Russia and OPEC.

    It makes no sense unless the prince is working with trump to get him elected. This type of "favor" would probably have a high rate of return.

    As for Russia, they also seem to be ignoring the US except, that they have had enough and will flood the market . WHich is going to casue trump and his oil cronies some pain.
  • Randall TAYLOR - 23rd Mar 2020 at 12:15am:
    "It looks like Saudi Arabia bets on tapping cash from its sovereign wealth fund to patch up government finances with oil prices three times lower than their break-even oil price."

    Perhaps she means "75%" lower than their break-even oil price. Hard to tell. In any event, "three times lower" makes no sense.
  • Wibi Harsum - 23rd Mar 2020 at 12:53am:
    This is not backfire. It is of course expected. They have been ready to cut budget and spending.

    However, I am being optimistic here. I think the oilprice will instead gradually increase as more and more vaccines and alternatives to tackle the covid-19. The big economies (minus USA) are able to slow down the outbreak and lower the death rate. They can slowly focus on the economy that would increase the oil demand.

    But who is the benefitted from this? Everyone!
  • Shaun B - 23rd Mar 2020 at 1:58am:
    The universe is finding balance.

    T,B,&Brt
    Ihab
  • Bill Simpson - 23rd Mar 2020 at 2:14am:
    As much as I dislike the Putin virtual dictatorship, I have to admit that he will most certainly win the economic war. Russia is just too vast, covering a significant percentage of the Earth, not to win. Especially now that the inefficient communist system is gone. They have nearly every mineral they need in order to prosper, inside their own country. The gas and oil lines to Europe and China will bring in billions of dollars each year. They could subsidize the loss on the oil exports, with the profit from the gas sales, for years.
    Pull up a map of the hydrocarbon basins inside the Russian Federation. They are enormous, even without what is under the Arctic Ocean, which is probably a lot, since the total area is nearly half the size of the United States. You are not going to find a country with more natural resources than Russia.
    Then there are all the other metals they can sell. The Saudis have oil. The Russians have oil, gas, and metals you have never heard of, and probably cannot spell, but they are worth billions, and save them billions by not having to import them for industrial use. During the Cold War, I saw a map made by the CIA of all the mines in Siberia. I can remember thinking that we could forget them running out of resources, as a reason for the defeat of their communist system.
    So you can forget the Russians losing the oil war. Of course, Putin is a brilliant man. There may be other reasons he might decide to call a truce in the oil price war. Just do not think he will lose, should he decide to keep fighting. He will not.
  • Santosh Vempelly - 23rd Mar 2020 at 4:01am:
    How US$133 billion is equals to SR 50billion?
  • Evil Raven - 23rd Mar 2020 at 4:30am:
    I see this as a religious war.
  • andy Y - 23rd Mar 2020 at 7:46am:
    Thanks russian and saudi be so stupid, now we american can stock pile dirt cheap oil in large amount.
  • A Nogat - 23rd Mar 2020 at 9:15am:
    50 Billion Riyals is only $13.2 Billion US Dollars not $133 Billion US Dollars.
  • Lou DiPalma - 23rd Mar 2020 at 12:11pm:
    The comments about destroying the US shale gas industry are a bit far fetched. True, the companies currently producing will most likely go bankrupt and some institutional investors will be hurt, but as soon as the price goes back up, new companies will start production right back up. The wells can just sit for a decade with no real bad effects and resume use quickly.

    The only real losers I can see besides the oil money dependent countries will be the fledgling electric vehicle market. With cheap gasoline their financial benefits of ownership will decrease significantly. However I do think that ownership will still increase but not as rapidly as with higher oil prices.
  • Diana Marie - 23rd Mar 2020 at 3:50pm:
    I do not trust Russia or Saudi Arabia. They are in cohorts and trying to destroy the newly revamped US shale industry that I personally believe was a very good thing. Putin, a jerk that accused the USA of oil wars, blah blah blah, then when we make a very positive change to get out of the Middle East, tries along with SA to destroy it all. I do personally believe President Trump has the best intentions and always has regarding US shale industry. This is not his fault it is the tyrant Putin’s who cares more about destroying America than even his own people. I pray Trump will find a way to save the US shale industry because it truly is a positive step in the right direction.
  • Bob Braveman - 23rd Mar 2020 at 5:30pm:
    Saudi Arabia is rulled by psychopathic crown prince, whom has no clue about economics or the oil industry.
  • Josh Brizzi - 24th Mar 2020 at 12:18am:
    Russia will win this war. What's going to happen is it gonna force the Saudi's to reconsider their investments in their wealth fund. Find out what most of that is. Their going to have cash in on a lot of those investments to make ends meet. What does this means for both you and I.

    You been notified...
  • Tim T - 27th Mar 2020 at 1:42am:
    MBS is killing two birds with one stone-- US shale and Russian arrogance. House of Saud wins since their cost is about $8/bbl.
  • Aceof Spades - 27th Mar 2020 at 2:08pm:
    Bet all you want against Russia, but keep in mind that President Putin has all the Aces.
    The pot is growing....nice!
  • Faisal Issa - 28th Mar 2020 at 2:42pm:
    Is pay back for the sanction on the pipeline don't behave like crown Whern you not stop crying because you stated sanction on existing sanction additional sanction on existing sanction now Putin should cut oil prices and more to the markets till USA comes to the table and they should stop complaining about Russia and work with Russia Putin a president with longer vision of 2029
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