The Oil Price War Between Russia and Saudi Arabia

Crude Oil and Economic Growth

The price of crude oil plays a vital role in the trajectory of the global economy. Over the past decade, crude oil prices have fluctuated significantly. Not only do crude oil prices impact the economy, but the economy impacts crude oil prices. Throughout the global community of economists, there has been a long debate surrounding the principles of oil price dynamics. The American shale oil revolution, strategies launched by the Organization of the Petroleum Exporting Countries (OPEC), geopolitical tensions throughout North Africa and the Middle East, and global economic activity are known to influence oil markets. In recent years, oil prices seem to be increasingly driven by global economic indicators and market fundamentals rather than being influenced by geopolitical tensions (Perifanis and Dagoumas, 2019). However, when market instability and geopolitical tensions are both present, oil prices tend to react dramatically.

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Geopolitical Tensions

A continued battle over control of the world’s oil market has increased geopolitical tensions between, Russia, the United States, and Saudi Arabia. As the U.S. became the world’s biggest oil producer in 2019, Russia and Saudi Arabia became increasingly concerned about American influence over global oil production. Moreover, increasing American oil exports have led to surging oil inventories for the world’s fossil fuel producers, contributing to a global supply glut. In order to counteract the surge of American oil exports, Saud Arabia started to advocate for oil production cuts throughout the rest of the OPEC member nations and Russia as 2019 was coming to close. However, negotiations related to the production cuts did not go as planned.

In a dramatic attempt to bolster the price of crude oil, OPEC leaders initiated a plan in March of 2020 to slash oil production by 1.5 million barrels a day. The oil cartel said that its 13 member nations had been working on a plan to distribute production cuts evenly, while also recruiting Russia (a non-OPEC nation) to supply additional production cuts. When the U.S. gained control over a significant portion of the global oil market, Russia formed an alliance with OPEC in order to try to counteract American influence. The need for global oil producer unity became even more apparent when fears related to the economic impact of the coronavirus outbreak paralyzed global economic markets. Since a downtown in economic growth adversely effects the fossil fuel industry, oil prices started to take a significant hit toward the end of 2019, as virus fears started to stunt global economic activity.

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Falling Demand and Increasing Production

As the coronavirus destroyed global oil demand, oil producers became increasingly concerned about how their business models would be impacted. Prior to the coronavirus outbreak, economic analysts from Goldman Sachs predicted that global oil demand would increase by 1.1 million barrels per day in 2020 (Horowitz, 2020). However, these estimates were proven to be vastly incorrect due to the unprecedented decline in economic activity.

Shortly after OPEC announced that it would be working with Russia to stabilize oil prices, Russian leaders shocked the world when they announced that they would be breaking from the alliance to increase oil production. Instead, Russian energy leaders decided that it would be more advantageous in the long run to continue to drown the world in a glut of oil in an attempt to bankrupt as many U.S. oil companies as possible. As part of the shale oil revolution in the U.S., companies relied on higher oil prices in order to fund the high cost of extracting oil and gas from shale deposits. While Russia lost its 2018 title of the world’s largest oil producer, the country’s energy leaders hoped to regain the top spot by putting more pressure on American producers.

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Crude Oil Price Crash

On Monday, March 9th, 2020, Russia succeeded in crippling the American oil industry when crude oil prices crashed by 34 percent, which was the worst day for oil prices since the Gulf War in 1991. As Russia vowed not to cut oil production, Saudi Arabia stunned the global markets by announcing that it would work to cut oil prices, which is a move that undermined OPEC’s original efforts to raise global prices. Turmoil between Russia, Saudi Arabia, and the rest of OPEC threatened the long-term prospect of survival for dozens of American oil companies that thrive on high oil prices. However, even gigantic, multinational American oil companies like Exxon Mobil and Chevron were adversely impacted by the prospect of lower oil prices. Even though Exxon Mobil and Chevron have developed business models that are said to be able to withstand oil price meltdowns, these companies’ stock prices plunged roughly 12 percent each after Saudi Arabia announced efforts to cut oil prices.

Russia’s move to break with the OPEC alliance, followed by retaliation from Saudi Arabia, initiated a global oil price war. Following the escalation in tensions, OPEC Secretary General Mohammed Barkindo, conveyed that Russia and OPEC would not be able to reach a consensus to extend the policies related to supply restraint. Russian energy minister Alexander Novak also released statements conveying how Russia would seek to make their own energy decisions that would support the best interests of Russia rather than the interests of OPEC’s leaders.

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The Energy Meltdown

The energy meltdown of 2020 resembled the pain that was felt during the 2014-2016 oil price crash that bankrupted dozens of American energy companies and forced companies to initiate hundreds of thousands of layoffs (Egan, 2020). While the industry as a whole survived the chaos of 2014-2016, the experience was extremely painful for fossil fuel companies, especially those that already held significant levels of debt.

For over three years, Russia had been working with the OPEC coalition to evaluate opportunities to prevent future oil price shocks similar to the one felt from 2014-2016. President Vladimir Putin had thoroughly aligned with Saudi Arabian Crown Prince Mohammed bin Salman in an effort to curb oil production to bolster prices. However, when it became apparent that Russia’s collaboration with OPEC would also benefit the American shale industry, Russian leaders became increasingly weary of the U.S. gaining more ground in the global oil industry.

Throughout President Trump’s tenure, his administration has employed energy as a political and economic tool to advance American imperialism (Arkhipov et al, 2020). The Trump administration’s use of sanctions against Venezuela added even more fuel to Russia’s disgruntlement with American foreign policy, given that Russia had extended a lifeline to support Venezuelan President Nicolás Maduro.

Russia has traditionally been in a good position to survive an extended oil price slump. Economic reports suggest that Russian oil companies break even when the price of oil hovers around $42 a barrel. On the other hand, the high cost of American shale oil production requires a higher price of oil to sustain a profit. Russian leaders broke an alliance with OPEC to starve American energy companies long enough so that Russia could once again regain its position as the global oil leader. While this would surely be detrimental for American shale oil producers, it has also been costly for Saudi Arabia. The Saudi Arabian government is almost completely dependent on oil revenue to fund the country’s spending. As oil prices fall, Saudi Arabia is forced to boost production to maximize revenue.

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The Fight Against Russia

When Russia and Saudi Arabia both started to dramatically increase oil production, the price of oil collapsed in spectacular fashion, which made some Wall Street analysts put a $26 price target on a barrel of oil (Arkhipov et al, 2020). The oil production standoff between Russia and Saudi Arabia also invited other Middle East countries to ratchet up oil production in an attempt to coerce Russia to drop out of the oil price war. Shortly after Saudi Arabia announced plans to increase production, the United Arab Emirates also unveiled how it was going to start pumping as much oil as possible. As a close ally with Saudi Arabia and Crown Prince Mohammed bin Salman, the United Arab Emirates has historically followed its neighbor’s lead when it comes to oil production output. Abu Dhabi National Oil Company revealed that oil production would increase to four million barrels a day, further escalating the pressure on Russia as well as American producers.

While the oil price war was mainly initiated between Russia and Saudi Arabia, increasing global oil production also threatened the rest of the world’s oil producers. As this escalation increased, officials from the U.S. Department of Energy publicly reprimanded all nations that aimed to manipulate and shock oil markets for political gain. With this in mind, the U.S. Department of Energy highlighted how American oil and gas companies would be able to withstand escalating tensions due to an oil price war. Even with these remarks from Washington officials, American fossil fuel companies were still dealing with the previous pain from years of persistent pressure from supply gluts, rising costs, and climate change concerns.

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Energy Market Weakness

Throughout the past decade, the S&P 500’s energy sector has been the weakest in the stock market. According to a report released by financial analysts at Raymond James, the energy market has underperformed the broader market in eight of the past nine years since the Great Recession. According to consulting firm Rapidan Energy Group, American shale oil companies may have been the victims of their own success. By producing so much oil and gas through fracking and other innovative technologies, a global supply glut was initiated, and oil prices collapsed. In addition to the notion of drowning in excess oil and gas supplies, some investors have been moving away from fossil fuels altogether and instead are moving into more socially conscious investing.

The oil price collapse of March 2020 was reminiscent of the collapse during the summer of 2014. As oil prices previously hovered around $120 a barrel, the price collapsed to just $28 by January 2016 (Gunderson, 2020). Economists and energy analysts were puzzled that Russia and Saudi Arabia would willingly enter an oil price war that ultimately reduced revenue for each country. According to the International Monetary Fund, oil needs to be priced at approximately $78.30 per barrel for Saudi Arabia to have a balanced budget, while Russia’s point of breakeven is around the $40-range (Worland, 2020). Interestingly, the oil price war that was initiated by these countries sent oil as low as $30 per barrel. Oil at $30 per barrel means that neither Russia nor Saudi Arabia would be making any money. While Saudi Arabia is caused more pain from low oil prices than Russia, Russia funding reserves may not be as plentiful as Saudi reserves.

Long-Term Strategy

While Russia and Saudi Arabia experienced short-term pain from the oil price war, both countries have experienced long-term pain from the American shale oil revolution. If low oil prices succeed in bankrupting at least a handful of American companies, Russia and Saudi Arabia could reap the benefits in the long run. However, given the influential lobbying ability of the American Petroleum Institute, the Trump administration may end up providing financial support to American oil and gas companies that have been hit hardest from the oil price war, which would counteract Russia’s strategy to bankrupt American companies.


Arkhipov, I., et al. (2020). “How Putin spurned the Saudis to start a war on America’s shale oil industry.” Los Angeles Times.

Egan, M. (2020). “Why Russia and Vladimir Putin are waging an oil war with America.” CNN.

Gunderson, T. (2020). “The Impact of U.S. Supply Shocks on the Global Oil Price.” The Energy Journal: Vol. 41, No. 1.

Horowitz, J. (2020). “OPEC unveils plan to slash production after coronavirus slams oil prices.” CNN.

Perifanis, T., & Dagoumas, A. (2019). “Living in an Era when Market Fundamentals Determine Crude Oil Price.” The Energy Journal, Vol. 40, SI1.

Smith, G., et al. (2020). “Oil War Escalates Again After Saudi and U.A.E. Promise Flood of Crude.” Bloomberg.

Worland, J. (2020). “Answers to Six Key Questions About the Oil Price Collapse.” Time.

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