It all started at what every-one thought would be a routine meeting between Opec and non-Opec nations in Vienna. There were the usual fake smiles and firm handshakes in front of the cameras from the dignitaries. Bored journalists roused themselves to prepare to write stories they expected never to be read, before they could at last head to the pub. And then, out of nowhere, came a bombshell.
Downward pressure on oil prices from the coronavirus panic was posing an obvious risk to Saudi Arabia’s still heavily oil-dependent economy. And this is what a cartel like Opec is for: to agree to release less oil into the market, pushing the price back up. A Saudi-led motion proposed a cut of 1.5 million barrels per day. To everyone’s shock, Russia rejected this outright. The market was already saturated, the Russians insisted, and henceforth the price should be determined by market forces. It was the very last thing the Saudis wanted to hear.
Mohammed Bin Salman, the kingdom’s de facto leader, is already infamous for making wildly impulsive decisions that have global (invariably negative) ramifications. He became hellbent on punishing the treacherous Russians. Aramco, the kingdom’s oil giant, immediately slashed prices to its key markets — most crucially China, the Saudis’ and the Russians’ most important customer — and promised to increase output within weeks by a staggering two million barrels per day. The result was immediate, and hit world markets almost as hard as coronavirus did.
Oil prices dropped by a third overnight, the biggest fall in three decades. The Dow lost more than 8 per cent, the FTSE 100 almost 9 per cent, Royal Dutch Shell and BP, the UK’s biggest energy companies, lost more than £32 billion — or about 20 per cent — from their combined market value. And all this as the WHO prepares to declare the coronavirus — which has already brought much of the global economy to its knees — a pandemic. Donald Trump quickly put two and two together. ‘Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!’ he tweeted, emphasising once again that he considers media reaction to the coronavirus outbreak to be hysterical.
Trump is facing two different risks. The coronavirus is enough of a problem, but there is another threat: that a pandemic could be used as cover for an assault on America’s recently acquired status as the world’s top oil producer. When the US was dependent on imports, low oil prices would have been welcome. But now that fracking has made America a net exporter of oil, it has new vulnerabilities. These are now being tested.
That’s why, this time, the Russians didn’t want to play the Saudi game. As far as Moscow sees it, it’s dangerous to cut oil production, because it would end up creating more demand for American oil. That would stabilise oil prices, but America would end up stronger. How could such an outcome possibly benefit Russia? Vladimir Putin thus put the motherland first, and unceremoniously abandoned a three-year supply pact with Saudi Arabia — it officially expires next month — whose goal had been to keep oil prices artificially high. (So much, incidentally, for Putin’s apparent determination to help Trump’s re-election campaign at every turn.)
The oil war is not all bad news for the US. It will still bring lower prices at the petrol station and is, in itself, a fairly decent stimulus. A Russia--Saudi fall-out will also be welcome on the back of a bitter dispute between Russia and Turkey (a Nato member) that recently left their armies fighting each other in northern Syria. Then there is Iran. Lower oil prices will further damage the economy of what is Russia’s most important regional ally, but America’s arch-enemy.
With the election looming, however, Trump’s focus is on the stock market, and at first glance understandably so. For the most part, Americans do not decide how to vote based on foreign policy matters. And since he obsessively takes the credit when the stock market reaches new highs, Trump fears being blamed when it tanks.
For ordinary Americans, the far more important issue is that no matter who wins the game of chicken between Russia and the Saudis, the US fracking industry will be the loser. Russia has nonchalantly made it clear that Moscow has enough resources to cover budget shortfalls for six to ten years even with oil prices at $25 a barrel. In contrast, the US fracking industry has an estimated $86 billion of rated debt due in the coming years. If the Saudis make good on their promise of flooding the global market with cheap oil — and they may be left with little choice — it could soon prove fatal for US shale producers, as investors tire of throwing money into their bottomless holes.
One wonders how Trump — who hates personal disloyalty more than anything — will react when he wakes up to the fact that the Saudi leader he has stuck with through thick and thin is now out to destroy the domestic industry Trump is most proud of. At the same time, one wonders, too, whether Bin Salman will ascend the throne and maintain the support of the Saudi masses during what are going to be years of unprecedented economic and political turmoil. Until now, he has essentially adopted the Singaporean model of governance, albeit with a brutal Arab bent: granting personal freedoms but restricting political participation in the name of social stability and economic growth. It worked in Singapore and the other Asian Tiger countries because elites delivered on their promises. It is increasingly clear, though, that Bin Salman will be unable to deliver on his.
As on many previous occasions — most obviously, in launching the disastrous war against Yemen and ordering the barbaric murder of Jamal Khashoggi — it is difficult to understand what motivates Bin Salman. Is he acting out of pure rage? Does he seriously believe that, as the global economy heads towards recession, there will be greater demand for Saudi oil to make up for the falling prices? Whichever way you look at it, his behaviour is inexplicable.
Everywhere you look in Saudi Arabia, disaster seems to loom on the horizon. This week the region of Qatif, a Shia stronghold in the oil-rich Eastern Province, was put under quarantine for two weeks because of coronavirus. All international visitors are now banned from entering the country, just months after the new tourism industry — part of a drive to diversify the economy away from oil — was launched. Mosques in Mecca and Medina have been closed, the umrah — or lesser pilgrimage — put on hold, and barring a miracle eradication of the virus in the next few months, the annual hajj will be cancelled for the first time ever. This means billions of dollars of lost revenues in a country with a colossal $50 billion budget deficit and which — because of Bin Salman’s most recent reckless move — is preparing an emergency budget for this year based on oil being as low as $12 a barrel.
Meanwhile, military checkpoints have been set up all over Riyadh, the capital, after Bin Salman launched yet another purge of perceived rivals. Dozens of senior princes, interior ministry big wigs and military figures were arrested and accused of planning an imminent coup with the help of Washington’s intelligence agencies. So Bin Salman, having alienated Russia and gone to war against the American shale industry, finds himself more isolated internationally than ever, and with no powerful friends or allies at home apart from the ailing king. He has torpedoed the world economy, and in doing so may have created other problems much closer to home.
Kate Andrews and journalist Owen Matthews on this week’s oil wars.