3 August 2020 06:18 PM

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ANURADHA CHENOY | 12 APRIL, 2020

Behind the Scene: The Oil Price Wars

Putin armtwists US and sidelines OPEC


Oil consumption declined with the Covid-19 crises and lockdowns, which means that oil prices should decline.

It is also a moment to think of alternatives to fossil fuels.

But oil producers always have a plan to keep fossil fuels going and prices high by cutting production, so their profits match fossil-fuel energy flows.

The agreement to cut production this week between Saudi Arabia and Russia, at the height of the Corona crises, comes just after a major showdown between the two, with the US cheering the Saudis on from the sidelines.

It is well known that countries which possess and export hydrocarbons like oil and gas manipulate prices by reducing or increasing their production and export, and thereby influence world economy and the geopolitics around this.

To regulate the oil market OPEC, the Organization of the Petroleum Exporting Countries, was set up in the 1980s and now has 15 member states. Russia is not part of this bloc but attends their meetings in what is known as OPEC+.

OPEC has functioned as a mutually backslapping monopoly club. Russia and the US (which is a leading producer of shale gas and hydrocarbons) are independent players with great capacity to control oil prices.

In early March parallel to the coronavirus outbreak as oil prices fell, Saudi Arabia proposed cuts in oil production to curb falling prices of crude which was selling at $50 a barrel.

Russian president Vladimir Putin refused to accept this production cut and continued with a high-level output. Russia’s refusal sent the oil price spiralling down to its lowest level since the 1991 Gulf War.

The Saudis, who see themselves as the world’s major player of oil output, decided on a direct confrontation with Putin. Not only did they cut crude prices but also increased the output of Saudi oil. This led to a further downward price spiral hovering around $30 a barrel.

Goldman Sachs predicted that this could go down to $20 a barrel, where it now hovers, since Russia has continued to increase its output creating a surplus.

Several reasons account for Putin’s game of cards.

One, even though Russia is more dependent on fossil energy finances, it has built huge monetary and gold reserves and tightened its budget since the 2015 oil shock and recession.

The economic sanctions against Russia by the West on the issue of conflict with Ukraine have led Russia to plan its economy as an ‘almost’ ready state of war. So the fall in oil prices is not going to hit them as perceived.

In fact the fall in prices is hitting the US economy, the Arabs and others in OPEC. Despite what the Russians say about their good relations with the Saudis and their collaboration on oil prices over the last three years, the Russian government is miffed at Saudi opposition to its military support of the Assad regime in Syria, and to its policies in West Asia.

So Russia has been able to show the Saudis their geopolitical place by hurting them.

Second, the US as a leading oil producer, exporter and guzzler on account of its shale gas rise has been challenging Russian and Saudi market domination, and leveraging its oil profits and pricing by cornering key markets.

But in this oil price war the US too has been forced to cut both prices and production. This has led to a crash in US oil stocks and the sacking of shale companies’ workers. US president Trump is worried for the country’s oil companies.

This has given Putin the upper hand, since Trump was forced to negotiate with Russia and Saudi Arabia.

Putin has shown his ability to armtwist the US and sideline OPEC in one go. He also took a swipe at the US for its unilateral sanctions whose severity it increased in March by sanctioning Russian oil major Rosneft after it sold oil to Venezuela, which too remains under US sanctions.

Third, the Russians have fairly secure markets for their oil such as the Chinese and even the Europeans. So Putin used his oil diplomacy to finesse both the US and OPEC, and show that they matter in global political economy.

But what about ordinary consumers?

It would seem that consumers can gain in a so-called ‘free market fall’ where they should see cheaper gas prices. But this is where the big oil companies come in.

In the US and other OPEC countries, the oil companies always put pressure on their governments so their profit margins are maintained.

One way has been to place tariffs against the cheap supplies from Russia and Saudi Arabia, or big subsidies and tax cuts for local oil companies and refineries.

In India for example, despite the fall in global crude, the government has increased excise duties so consumers cannot get cheaper petrol, even as the government gains. It is a similar situation in many other oil dependent countries.

Keeping Carona in mind, this week Saudi Arabia and Russia agreed on a mutual cut in oil production. This has appeased OPEC+, especially the US.

But for Putin the game is not over. He will calibrate oil production to suit Russian geopolitical interests.

Meanwhile the climate emergency is a major issue of anxiety, and there are calls to end fossil fuel use. Corporations and states continue to push this call aside. Further, the coming recession, inflation and oil crises have been overtaken by anxiety over the coronavirus.

In this scenario it is likely that like big pharma, big oil will also prevail.

So will the big state, unless people understand who the gainers and losers are, and act collectively to build chains of resistance for their own present future.

Anuradha Chenoy is retired professor and former dean of the School of International Studies at JNU

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