Haseeb Asghar
The Covid-19 known as coronavirus, which emerged in December last year in Wuhan, China has wreaked havoc around the Globe. It is estimated that about 4 million people have been infected with the disease so far and millions have died.
To understand the conflict properly, we have to look back to December 2016 when Russia and Saudi Arabia signed an OPEC Plus agreement between non-OPEC countries and OPEC countries in Vienna aimed at stabilizing oil prices and lowering prices
The world is currently facing a double whammy. in the energy sector, while the coronavirus Pandemic wreaking havoc, at the same time the oil conflict between Oil-rich Saudi Arabia and Russia has turned the world energy economy upside down.
The controversy began when the global epidemic of coronavirus destroyed the balance of supply and demand for crude oil, As a result, Saudi Arabia cut oil production to boost oil prices. Saudi Arabia wanted to reduce the impact of the global coronavirus outbreak.
But at the same time, Russia reacted and stopped cooperating with the Organization of the Petroleum Exporting Countries (OPEC), which was to some extent tantamount to challenging Saudi Arabia’s monopoly on oil exports to Asian markets.
To understand the conflict properly, we have to look back to December 2016 when Russia and Saudi Arabia signed an OPEC Plus agreement between non-OPEC countries and OPEC countries in Vienna aimed at stabilizing oil prices and lowering prices
Saudi Arabia has proposed to Russia to reduce its oil production in order to keep oil prices stable and balance in the world market, but Russia has not only rejected the demand but also announced its withdrawal from the Vienna Agreement.
Russia’s unexpected response resulted at the end of OPEC Plus, and this was the beginning of the oil war between Russia and Saudi Arabia.
There is no doubt that Russia is a huge country rich in minerals, but still, Saudi Arabia will not suffer as much from this oil dispute as Russia will, Russia will suffer an extraordinary loss if the conflict of oil will continue for long
Saudi Arabia’s control of the oil market began in March 1938 when an American company, Standard Oil Company of California, which later became the Arab American Oil Company (Aramco), which drilled out of the Dammam oil field at a depth of 1440 meters.
The oil field began to produce 500,000 barrels of crude oil per day by 1949. In 1958, Aramco produced more than 1 million barrels of crude oil in a calendar year, increasing Aramco’s control over Saudi Arabia’s oil. Saudi Arabia’s grip on the world market has grown stronger and stronger.
Saudi Arabia currently has 18% of the world’s petroleum reserves, more than any other the country in the world in terms of individual reserves, making it one of the top oil exporters in the world.
According to 2015 estimates by the Organization of the Petroleum Exporting Countries (OPEC), Saudi Arabia has 267 billion barrels of oil reserves. And if Saudi Arabia’s public investment funds and overseas assets are compared to Russia’s, then Saudi Arabia is far ahead of Russia.
In this situation, Russia’s economy, despite being a huge country, it is subject to sanctions imposed by Western countries, while its most important industry is oil.
If we look at the production cost of Russian oil, Russia’s production costs are higher than Saudi Arabia’s. If capital and production costs are taken together, Russia’s costs take a completely different form, which in no way appears to be in a position to compare with Saudi Arabia’s.
However, if only the cost of production is taken into account, Saudi Arabia can easily meet its targets even at low oil prices without facing any problems.
Technically and practically, Russia’s oil production is already at an all-time high, while transportation to and from the oil and gas markets remains a major problem.
The oil dispute with Saudi Arabia is escalating, which is not a problem for Saudi Arabia at the moment, but it has caused concern to the Russian government.
After the dispute, the Russian president called an emergency meeting via video conference with the energy minister and representatives of the country’s energy firms and expressed his concern, saying “we have never seen such a the situation in the global energy market before.” An extraordinary development.
He noted the sharp decline of oil supply in the global economy due to the Coronavirus Pandemic and said that a concerted effort was needed to balance the energy markets, such as the agreement reached between OPEC and oil-producing countries.
While the Russian government is troubled by this extraordinary development, no statement or action shows the Saudi government suggests that it is in financial trouble from the conflict.
Russia and OPEC have not agreed on a new deal to cut off supplies, while Saudi Arabia has signaled it will reduce oil prices and increase supplies.
On the other hand, more investment is needed to sustain Russia’s oil and gas production, a dramatic increase in production requires a lot of cash and technology that Russia does not currently have, while current and the new restrictions are already limiting production activities in remote and central areas.
Russian companies do not have the kind of access to global financial markets that Saudi Aramco has, as Russia’s oil, gas, and financial sector development has been hampered by Western sanctions. Saudi Arabia still has the potential to enter the financial markets at a very high level, and it is more accurate to say that it is the most powerful.
In other words, it would not be wrong to say that the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, is back in the driving seat.
Let it be known OPEC does not represent all oil-producing countries, there are many major producing countries that are not members, including the United States, Russia, China, and Canada. However, the organization has about 40% of the global market Represent and have in the past influenced the global market by reducing production
Saudi Arabia increased its production after rejecting Russia’s offer of a reduction in prices, followed by Abu Dhabi, following the way of Aramco, and significantly increased its production.
In my opinion, Russia did not expect such a response from Saudi Arabia and OPEC countries. Contrary to Russia’s expectations, OPEC member countries are regularizing their production, which has led to a reduction in Russia’s oil prices in the world market. The price will be affected more than the general estimates.
I think Russia is a great power and it will certainly have economists, advisers, intelligent minds who keep an eye on world politics and the economy. It was not anticipated that if the Gulf countries increased their production, it would not only affect US oil, but also Russia.
Given the recent economic and political background and foreshadowing, Riyadh has played a very good masterstroke, offering to sell Saudi crude oil to European countries, including the United States, at very low prices.
It is a timely decision by Saudi Arabia’s far-sighted and top economists that will adversely affect Russia’s consumer market, which Moscow had no idea.
As I said earlier, access to Russia has been limited due to economic sanctions imposed by Western countries and Russia will have to use huge costs to increase its oil production, which is not a wise decision for Russia at the moment. But Saudi Arabia has the potential to increase its production and export, while Moscow is well aware that to raise oil prices, in general, is not the right the decision, this will also affect natural gas exports to Europe and other regions, as gas contracts are partly linked to oil prices.
