The oil price war between the United States, Russia, and Saudi Arabia have significantly impacted geopolitics, climate change, and the global economy. Oil prices plummeted over the world as a result of the Covid-19 epidemic. Crude oil was originally priced at $60 per barrel but has since plunged to about $20. The core economic concept of demand and supply chain pertains here, which states that the price of everything in a free market is determined by demand and supply. If the demand for something exceeds the supply, its price shall increase, and inversely. The identical principle adheres to oil circulation. If the oil demand exceeds the supply, the cost will increase. The United States, Russia, and Saudi Arabia are the most prolific oil producers in the world. However, not only these major producers, but all oil-producing states aim to sell as much oil as they can for the best price in order to maximize their profits, which fosters international competition.
In general, in an international marketplace, states that buy oil seek the lowest price, resulting in rivalry among oil-producing states. That reflects that refiners would keep the price as low as possible so that oil is purchased from them and they gain profits, lowering the profit of everyone else. A contender is that all agree to regulate supply and pricing cooperatively, allowing everyone to earn a decent profit, hence benefiting all. As a result, certain oil-producing states have formed an alliance known as OPEC (Organization for Petroleum Exporting Countries), which includes 13 states, including Iran, Iraq, Kuwait, Libya, Nigeria, the United Arab Emirates, Venezuela, and Saudi Arabia. OPEC is basically an agreement between these states where they sit together to decide what the price of oil should be and how to control supply, which prevent the fluctuations of price and ensure profits for everyone.
Together, OPEC and a few non-OPEC nations signed a deal in December 2016 to raise oil production to a maximum of one million barrels per day to maintain market stability. This was really due to something else, which will be discussed later in this paper. Thirteen OPEC members and ten non-OPEC members came to this arrangement. Mexico, Kazakhstan, and even Russia was among these ten states. OPEC+ was the name of the coalition that Saudi Arabia and Russia had formed. Combined, these 24 states accounted for 55% of the global oil supply. The global economy was significantly impacted by OPEC+. Nonetheless, the United States remained a nonmember and a rival to the members of OPEC+.
Later, in 2020, the pervasiveness of Coronavirus caused a lockdown that resulted in the closure of numerous enterprises and businesses. This dwindled air traffic and shipping, which in turn decreased the amount of oil used. Oil prices declined as a result of the decline in oil demand. To maintain price stability, the supply of oil must be curtailed in tandem with the declining demand. Therefore, to preserve market stability and allow all oil-producing nations to make money, OPEC resolved to cut oil output by 1.5 million barrels per day during a meeting in Vienna on March 5, 2020. OPEC communicated this to the non-OPEC states as well, including Russia. This was further conveyed to the members of OPEC+, seeking them to reduce their output so that profits could be made by all. However, Russia denied, increasing production substantially resulting in the end of the agreement between OPEC and Russia.
An obvious question that arises here is why did Russia do so?
That is because if oil prices fall then all the oil producing states would bear the brunt, be it USA, Saudi Arabia or even Russia would harm itself by doing so. The reason behind this was that Russia wanted to attack USA’s Oil industry in the form of oil prices, unlike a conventional attack. Despite the conflict involving Russia and the United States has remained occurring since the 1950s, it began in the energy sector around 2014. In reality, between twenty and thirty years ago, the United States imported oil, as opposed to generating plenty of oil locally, it imported it from other states. From 2010 to 2014, the US oil industry underwent a revolution that was triggered by the discovery of “shale oil,” an innovative form of oil drilling that combined horizontal drilling with hydraulic fracturing, later named the “Shale Energy Revolution.”
Consequently, the United States was able to extract more oil from its existing oil reserves at a higher profit making the USA the world’s top shale oil-producer, which proved to be revolutionary. Russia and Saudi Arabia lost market share and fell behind the United States. Oil prices dropped and the supply of oil expanded as a result of the extraction of shale oil. This meant that Russia’s and the OPEC members’ profits started to decline. The OPEC nations first believed that to continue making money in years to come, they would need to destroy the US oil sector and hold onto their market share when the shale energy revolution first got underway. With the oil prices falling globally as a result of the OPEC states’ decision to boost output, the USA chose to cease generating shale energy since it was no longer viable resulting in later becoming the sole oil producers.
In the USA, oil drilling is carried out by private companies. Should these companies file for bankruptcy, the US government would not step in to save them. However, in nations like Saudi Arabia and Russia, the oil companies are nationalized, meaning that the government maintains direct control over them by providing funding to keep them operating. OPEC countries desired that when US private enterprises would experience losses, they would close and eliminate competition. In the end, all involved in the competition, were going to pay the price. Subsequently, they would receive compensation from the governments to sustain their losses, thereby allowing them to continue competing. However, the plan failed because some private oil-producing firms in the United States continued to operate, allowing them to sustain themselves even as oil prices declined. To regain its market share in the oil production industry, Russia was still determined to drive out American private enterprises from the competition.
There are other multiple reasons why Russia was furious with the USA. First off, the sanctions that the United States has placed on Russia as a result of the Crimea and Ukraine conflicts are already having a significant impact on their economy. Russia believed that it could accomplish what OPEC had not been able to do for the United States: bear the brunt of sanctions for a while before using oil prices as a weapon against the USA’s oil companies. Secondly, Nord Stream 2 was another project that the United States sanctioned, causing losses for Russia.
Since low oil prices persisted for an extended period, causing the US’s small businesses to suffer significant losses due to poor demand, some of these companies went bankrupt, and what Russia desired, happened to some extent. Exxon and Chevron, two large corporations, had sufficient capital on hand to cover their losses, though. In response, Saudi Arabia increased its production to preserve its market share since it too had suffered for a while effortlessly and calculated that after a halt of US-based businesses, they would benefit and if Russia is unable to sustain itself, then too, it would benefit because everyone would come to them to buy oil. The US government subsequently slated assistance to the oil drilling companies to prevent them from going into insolvency. Meanwhile, Russia had sufficient reserves to cover the blows in the short term but in the long term, the Russian economy suffered due to its primary reliance on oil exporting. In conclusion, minor nations with oil reserves bore the bulk of the overall competition between the major rivals. For instance, considering the low cost of oil, states like Iran, Iraq, Brazil, Argentina, Ivory Coast, Malaysia, Indonesia, Azerbaijan, and Kazakhstan could not export oil for revenue. Furthermore, weak nations’ whole economies relied on oil and lacked the resources to support their economy in the long run with such a small margin of profit. Moreover, the nations that purchase oil, such as China, Japan, and India, stand to gain the most from this scenario. Unfavorably from an environmental standpoint, everything about this scenario is detrimental since, in the modern era, everyone is switching to electric vehicles, and the cheap availability of fuel and oil is unfortunate for the electric vehicle businesses. On top of that, if oil would be that cheap, producing recycled plastics would become more expensive than producing new plastic leaving almost no financial incentive for the businesses to recycle. These nations are now considering moving to renewable energy sources in order to reduce their reliance on oil. Thus explained, a war for one is a war for all in today’s globalized world since the actions of one state affect the course of the entire global structure.
The author, Aina Khan, is a student of bachelors in strategic studies at the National Defence University, Islamabad.
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