Middle East
An Economic Snapshot of Covid-19 in Saudi Arabia written by Ala’a Sukhera Photo:Alexey Nikolski, Sputnik, AFP, Getty Images, 2019.
Reduced movements by land and air caused by Covid-19 resulted in a lack of demand and oversaturation of oil in the global market. This led to dropping oil prices as the pandemic spread. Oil consumption is estimated to have fallen by 25 million barrels per day in the first quarter of 2020. The Kingdom of Saudi Arabia and other Gulf region producers hoped restraining oil production would staunch the fall of prices as the year progressed, but soon realised they would need to take action beyond the 13 OPEC states (Organisation of Petroleum Exporting Countries) to restore stability in the oil market. At the beginning of March, Saudi Arabia met with Russia, which leads an additional 10 states in the OPEC+, and other non-OPEC members to discuss reducing oil production in order to raise prices again. Russia did not agree to this strategy, arguing it would benefit US shale oil producers, or frackers, most. This view likely stems from a Russian desire not to repeat the outcome of the 2014 crisis. US frackers increased oil production by 3.5 million barrels per day between 2008 and 2014. Demand did not match the significant increase in oil, resulting in a price crash. Saudi Arabia attempted to hinder their new North American competition by flooding the market with oil. Shale producers simply found cheaper ways to operate and prices did not recover until 2016 when Russia and Saudi Arabia agreed to cooperate in managing prices. This created the informal alliance of OPEC and OPEC+. Their production cuts raised prices again, bolstering US shale, which became the world’s leading crude oil producer in 2018. It is therefore understandable why Russia was not enthusiastic to cut production and raise prices again this March, as it would help the US maintain market share
it had taken from Russia and other OPEC+ members in the aftermath of the 2014 crisis. The March negotiations failed, and international crude prices further decreased. Saudi Arabia proclaimed a price war on March 6th by increasing its oil production by 2 million barrels per day, bringing prices down to an 18 year low of $20 per barrel on March 8th. This was a strategic move. Firstly, the Kingdom’s ability to plunge prices was a timely reminder for the global audience that they are the world’s lowest-cost oil producer. Consequently, other oil-producing countries directly or indirectly depend on them for their share in the market. The drastically lower prices also allowed Saudi to recoup some of the market shares it had yielded to US shale and others. Likewise, the price crash guaranteed a future market for Saudi exports by solidifying relationships in Asia, particularly with China and India. Their display of oil market volatility discouraged the two rising powers’ plans to develop domestic fracking, hindering their progress towards self-sufficiency of oil supply, and maintaining their dependence on Saudi oil. In turn, this aids Saudi’s goal of diluting its own dependence on the US. Equally, the prospect of several years of cheap oil in the market halted investment by other high-cost oil-producing countries, successfully inhibiting any switch to energy sources other than oil, which is crucial in a world that has recently been considering more renewable forms of energy. Finally, the most negatively affected countries were not Saudi allies. Russia and Iran depend heavily on revenue from oil exports and are two of Syria’s main backers. Damage to their economies would not worry Saudi Arabia, which has
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Dialogue • Autumn 2020
