10/06 – International News Story

If Saudi Arabia follows through with plans to increase crude oil production, it could deprive Moscow of crucial funds needed to support its war economy. Riyadh is frustrated by the failure of other oil-producing nations to coordinate on cutting supply to boost oil prices to around $100 per barrel, up from the current $70. Oil traders suggest Saudi Arabia might respond by increasing its own exports to gain market share and profits, even as prices drop.

This strategy could significantly lower oil prices, posing a threat to Russian President Vladimir Putin. Over the past decade, oil and gas have provided the largest revenue source for Russia, accounting for as much as half of its budget. 

Mikhail Krutikhin, a Russian energy analyst, warned that Saudi Arabia’s potential move presents “an enormous risk” to Moscow’s budget due to its heavy reliance on oil revenue. He also noted other unpredictable factors, such as the upcoming U.S. presidential election.

Krutikhin added that Saudi Arabia is well aware that Russian companies are not complying with production cut agreements, so it is making its own plans. Economists estimate that a $20 drop in oil prices could reduce revenues by 1.8 trillion rubles ($20 billion), equivalent to around 1% of Russia’s GDP. The Kremlin would face a tough choice: either cut spending or accept higher inflation and interest rates, though cutting spending is unlikely during a war. [Politico] 

The Financial Times recently reported that Saudi Arabia might abandon its long-standing goal of limiting crude supply to push prices towards $100 per barrel. Experts believe the country has the capacity to shift its strategy and dominate the market through increased volume.

Global oil demand is not as high as Saudi Arabia would like, and other producers, including Russia, are exceeding their production quotas. This has kept prices well below $100 per barrel, testing Saudi Arabia’s patience. Saudi Arabia could signal to the market that it will prioritize market share over high prices if other producers do not cooperate. [Politico] 

Russia, along with nations like Kazakhstan and Iraq, has been accused of exporting more oil than agreed upon under the OPEC+ cartel. Despite sanctions over the war in Ukraine, Russia’s fossil fuel revenues have risen by 41% in the first half of this year alone, according to its finance ministry. President Putin has vowed to keep fossil fuel production going to sustain Russia’s struggling economy, asserting the country’s prominence in the global energy market.

In defiance of global climate efforts, Russia is planning to maintain oil production at 540 million tons annually until 2050. The country has also used a “shadow fleet” of old vessels to bypass the $60-per-barrel price cap imposed by the G7. Middlemen in countries such as Turkey, China, and India refine Russian oil into petrol and diesel, selling it without sanctions. This loophole earned Russia $25 billion since the full-scale invasion began.

Although Saudi Arabia’s actions may further squeeze Russia’s finances, experts believe that the Kremlin will not abandon its war in Ukraine, even as the economy shows signs of strain.