A year ago, Saudi Oil Minister Ali Naimi made it plain that he didn’t care what happened to Russia if oil-producing countries failed to cooperate with Saudi-dominated OPEC on keeping prices high by restricting production.
“We want to tell the world that high efficiency producing countries are the ones that deserve market share,” he said, before singling out Russia’s West Siberia as a region that wasn’t very good at producing competitively priced oil.
Since then Russia’s oil-dependent economy has been decimated as the price of oil has plummeted. Here is the chart of the Russian economy from OPEC’s most recent report on the state of the global oil market:
Note that Russian GDP was growing until this time last year, when the Saudis signalled that they were going to pump Russia into oblivion.
All year, oil-producing countries have been in a mad race to the bottom. Russia and the US (and a bunch of other countries) refuse to cooperate with OPEC to keep prices high, so Saudi Arabia and OPEC have been furiously pumping cheap, competitively priced oil. The increased supply has driven down prices. Oil started the year near $55 a barrel and is now nearer $35, as this Bloomberg chart of West Texas Intermediate shows:
And oil is going to stay cheap. OPEC said that a barrel of oil won’t be worth $100 until after 2040, in an in-depth report on long-term energy trends.
Cheap oil isn’t good for the House of Saud either, but the Saudis have more money and cheaper oil than the Russians. So pain for the Saudis is agony for the Russians. The theory is that the Saudis are trying to force Russia into OPEC, according to Ambrose Evans-Pritchard of The Telegraph:
Kremlin officials suspect that the aim of Saudi policy is to force Russia to the negotiating table, compelling it join Opec in a super-cartel controlling half the world’s production.
The Russians aren’t having it, the CEO of Rosneft told the Financial Times earlier this year. President Putin, of course, famously does not like to be forced to do anything, so it’s unclear why the Saudis thought this tactic would work.
The other factor is the Americans.
Both Russia and the Saudis would prefer it if the US’s shale oil fields went out of business. That would leave the growing Chinese market open for Russia to expand its market share there. (The Russian conspiracy theory is that the Saudis want Russia to restrict supplies only because it will curb Russia’s entry into China, leaving China open for the Saudis.)
No matter how you arrange all these moving parts, the upshot is that both Saudi Arabia and Russia are bearing the pain now in the hopes of keeping the price so low that it drives the US sites out of business later, according to Quartz:
They have argued that their enormous cash reserves will allow them to weather any price for as long as it takes to finally force upstart US shale drillers to turn off their spigots.
The war has cost Russians dearly. This OPEC chart of Russian monthly unemployment (at right) shows percentage changes.
Russia has responded not by laying people off — at 5.5%, unemployment is technically quite low — but by reducing wages and work hours. These OPEC charts of sales and production show how Russians have basically stopped making things, and stopped shopping, as much as possible: