Russia Enters Oil Price War to Teach MBS a Lesson on Limits of US Support for Saudi

A cash-strapped MBS may find the US isn't nearly as helpful when he doesn't have billions in bribes ready

Moscow’s understanding of the OPEC+ deal was that in return for Russia’s help in propping up the oil prices the Gulf Arabs would reinvest some of the proceeds in Russia (and make up for sanctions) but that didn’t really happen

After the latest round of U.S. sanctions against Russia was signed into law last year, Russian president Vladimir Putin warned that Russia would retaliate at a time and place of its own choosing. Wrecking the OPEC-Plus arrangement and provoking a demolition-derby price war with Saudi Arabia may seem to be an odd and puzzling way to respond, but there may be a method to that madness. I believe that the Kremlin is gambling that, by year’s end, it will be able to not only push back against the United States but also to reconstruct its partnership with Saudi Arabia.

One of the major flaws of U.S. politicians is their bad habit of loudly proclaiming their strategies months or even years in advance, giving their adversaries plenty of time to prepare. Over the past two years, members of Congress have made it absolutely clear that Russia’s Ukraine bypass pipeline projects—Turkish Stream and Nordstream-2—were in their crosshairs.

Moscow attempted to accelerate the completion of these projects before a slow-moving U.S. legislative process could finalize another round of punitive sanctions. Turkish Stream was completed just in time and is already sending Russian energy to Turkey and Southern Europe. Meanwhile, Nordstream-2 would have made it if it hadn’t been for those pesky Danes and their environmental protection processes, which held up work on Nordstream just long enough for an eleventh-hour U.S. sanctions push.

Even with that assistance—and thanks to a spat with Denmark over a possible sale of Greenland—Moscow had so much advanced warning that it asked its European contractors to focus on the most technically challenging parts of the line first. Gazprom possesses the technical capacity to finish the line—way behind schedule, to be sure—but Nordstream is likely to be completed by the end of 2020.

Yes, the delay was sufficient enough to compel Russia to continue to use Ukraine for some export transit, but Moscow’s position in the European energy markets remains largely intact.

So the backup U.S. plan has been to encourage Europeans, while Nordstream remains unfinished, to buy more energy produced from North American sources. Indeed, an important part of U.S. strategy in a new era of great-power competition is to compete with Russia for energy markets and to diminish the resources Moscow can accrue as an energy exporter.

Initially, the U.S. strategy during the second term of the Obama administration was to encourage Saudi Arabia to repeat its performance during the 1980s by using its ability to turn on the taps and drive prices downward so as to cripple the Russian producers and force Moscow to pull back from its efforts in Ukraine and Syria.

Despite Saudi Arabia lowering energy production costs, Riyadh could not sustain a long-term price war due to the massive demands on the Saudi budget. Saudi Arabia dramatically shifted away from competing with Russia and towards a new strategy of coordination with Russia.

Riyadh and Moscow eventually became the co-axes of the OPEC-Plus arrangement, which was designed to stabilize global energy markets and set a definitive “floor” for energy prices. In return for its cooperation, Moscow expected Saudi Arabia and other Gulf states to direct financial flows that were blocked by U.S and EU sanctions into the Russian economy. (Qatar’s purchase of a minority stake in the Russian state-owned Rosneft firm was one example of this approach.)

Yet the weakness of this approach was the wild card nature of the U.S. energy sector. American producers were poised to benefit from higher prices and to fill the gaps when Russia and Saudi Arabia cut their production. When the United States declined to take part in the OPEC-Plus arrangement, Russia’s continued participation would remain contingent largely on whether Saudi Arabia continued to incentivize Moscow’s compliance.

We have seen over the past several months a new hardening in the Kremlin’s policies—where Russia is willing to risk escalation in order to gain advantage or discredit the United States.

The world has watched this pattern unfold in Syria vis-a-vis Turkey over the past several weeks. The Russians pushed through some of Ankara’s red lines and then let Turkey see to what extent it could or could not rely on the United States and its European allies—and then President Recep Erdogan traveled to Moscow to re-open negotiations with Vladimir Putin.

Russian energy producers have felt that they were on the losing side of the Moscow/Riyadh access. They have been vociferously arguing for a year that Russia should exit the deal. [They new projects and more capacity coming online which they then can not use.] The coronavirus panic provided them with an opportunity to argue that further OPEC-Plus cuts would do nothing to prevent a collapse of energy prices—and that Russia would continue to lose market share.

The Saudi response has been to match and call Russia’s bluff by promising to produce more at even lower prices. But the Russians still have several advantages: the Russian budget can meet its targets with far lower prices than Saudi Arabia’s budget will allow; Russia can increase its pipeline exports while a Saudi Arabia increase would take longer to get to markets by seaborne tankers; and, most importantly, the places where the Saudis want to compete with Russia for market share—the European market—will crowd out more expensively produced American exports.

Russia seems willing to engage in a major stress test of the U.S. energy export approach to a prolonged price war. Given that the Trump administration is unlikely to purchase large amounts of U.S. production at a guaranteed high price for the strategic reserve, U.S. producers will face the prospect of much lower revenue—and reach a point where it no longer makes business sense to stay in operation. While some projects are likely to be absorbed by the energy majors, whose economies of scale can make some projects cost-effective, overall U.S. production may decline. And if Joe Biden takes up residence at 1600 Pennsylvania Avenue in January 2021, then Americans could expect to see many of the Obama-era environmental and land-use regulations back in full force—further striking both at production as well as building more export infrastructure.

Would the Saudis then be more inclined to return to bargaining with Moscow? Possibly. A good deal depends on how U.S.-Saudi relations fare during a prolonged energy price war.

Prince Mohammad bin Salman, who already has his detractors on both sides of the political aisle in Washington, may find it harder to go through with major Saudi purchases of U.S. goods and services in the context of price competition.

In turn, he may find that the United States has become far less willing to extend blank security checks to the Saudis.

Moreover, if Russia loses its incentive to act as a restraining force on Iran, then the United States has shown limits to the extent it is willing to take on Tehran for Riyadh’s benefit. Another Persian Gulf crisis would not only increase energy prices but reinforce Russia’s pitch that its Northern Route is a far safer energy export bet.

So Russia enters this oil price war with two overarching objectives: drive U.S. producers out of business, and expose Riyadh to the limits of American support. Thanks to a talented team at the country’s Finance Ministry, they have the rainy-day funds in place to achieve that goal. Putin has taken a page from the Trump playbook of trade wars: be prepared to take short-term damage if you think your opponents will be forced to concede. Perhaps these will assumptions hold up in the weeks and months to come.

Source: The National Interest

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Skoolafish
Skoolafish
3 months ago

The headlined picture is taken from Putin reacting to the Russian World Cup football 5-0 thrashing of Saudi Arabia

Russia FIVE – Saudi Arabia ZERO, ZILCH, ZIP, NIL, NOUGHT, NUFFINK

https://www.youtube.com/watch?v=SDY1N-IJOA8

Howdy.Modi
Howdy.Modi
3 months ago

i suggest everyone block this ‘bob’ troll and downvote his posts.

he is doing classic hasbara 101 that is called ‘poisoning the well’ , which means he want to hijack the thread by posting obvious nonsense that ppl will argue with him endlessly.

if the comment section full of ppl responding to the hasbara then his misson is complete.

Block , Downvote , and resume commenting on topic

Canosin
Canosin
3 months ago
Reply to  Howdy.Modi

agree

Jihadi Colin
3 months ago
Reply to  Howdy.Modi

Bob isn’t even smart enough to be Hasbara. He’s just a bad CIA online keyboard warrior or wannabe. Actual Hasbaraganda is relatively sophisticated and operates from a handbook which is available for reference online. Crude propaganda is much more likely from CIA shills, but bob strikes me as too incompetent even for that.

Howdy.Modi
Howdy.Modi
3 months ago
Reply to  Jihadi Colin

his task here is to make the comment section unbearable by ppl trying to correct “bob” and whole comment section arguing with bob.

in that he achieved his task known as “poisoning the well” , after ruining comment section and making ppl loath to visit due to endless trolling and pointless argument , his fellow hasbara will come injecting polite but pro west / US narrative in here.

this is how they take over website blogs

Jihadi Colin
3 months ago
Reply to  Howdy.Modi

The solution to that is to ignore him totally after a statutory declaration that he is what he is.

stevek9
stevek9
3 months ago

If the shale producers want to stay in business … they may have to join OPEC.

JustPassingThrough
JustPassingThrough
3 months ago
Reply to  stevek9

now that’s funny 👍🏿

bob
bob
3 months ago

Nord stream 2 aint ever gonna deliver any gas,bet your mums house on that!

Oil is still priced in US dollars $$$$$$ not rubbels,or whatever that rather insignificant currency is called

But Putin is gonna have his oil war,and then have to give away his wealth fund just to give his citizens what Europeans and Americans take for granted,you know thats what you get when one has a successful and diverse economy,unlike the giant gas station, also known as Russia which is looking more and more like its got
Dutch disease

Mark
3 months ago
Reply to  bob

Thanks for helping to make the point, Bob; Russian oil is PRODUCED in ruble cost but SOLD for dollars or euros, meaning that the lower the ruble exchange rate, the greater the profit realized when the product is sold. Russia can get under just about any other producer, because its production costs are lower, and far, far below what the USA needs to get per barrel before it is losing money instead of making it. Russia needs oil at about $42.00 a barrel to balance its budget, while Saudi Arabia needs it at about $80.00. The USA probably needs it at about $65.00, but that’s just a guess; anyway, below that, Russia is still making money while Washington is not.

Jesus
Jesus
3 months ago
Reply to  bob

US attempt for energy preeminence will fail as the frackers will be out of business along 5-6 million barrels a day, and their LNG price is not competitive.

“””unlike the giant gas station, also known as Russia which is looking more and more like its got
Dutch disease”””

Unlike the giant Ponzi scheme also known as the Wall Street which is looking more and more like its got Dutch elm disease by dropping 25% in a few days. Wall Street goes bankrupt so does the US economy.

Canosin
Canosin
3 months ago
Reply to  bob

the usual cackle of nonsense from Bob, the idiot in chief….

bob
bob
3 months ago
Reply to  Canosin

You enjoy it,so stop yapping

JustPassingThrough
JustPassingThrough
3 months ago
Reply to  bob

dumber than dirt.
overpaid murikan troll.
back to porn hub, bunkie.

IM DeRose
IM DeRose
3 months ago
Reply to  bob

Careful bob, failing to give proper praise to lord god emperor puntang and the mighty russian empire will get you an earful on this here site…me thinks I hear grumbling from the faithful below….

JustPassingThrough
JustPassingThrough
3 months ago
Reply to  IM DeRose

bob talking to his alter-ego
dumb and dumber

Carlos Santos
Carlos Santos
3 months ago

kkkkkkkkkkkkkkkk

thomas malthaus
thomas malthaus
3 months ago
Reply to  bob

If a global financial crisis results in frozen credit market, Russia may declare a force majeure, as would Ukraine. That could mean the gas would may stop flowing from Russia into Ukraine.

Nord Stream I may shut down for similar reasons. I believe under such circumstances, previous contracts become null and void and may or may not be renegotiated.

Otherwise, it’s comfortable to have a Sovereign Wealth Fund and about $221 billion in sovereign gold stores.

I haven’t heard or read any official reports on Russia’s sovereign silver quantities.

Of course gold and silver fluctuate on a daily basis.
An item of interest to many is if and when Russia and China-individually or collectively-declare a gold link with their fiat.

That realization may be a few short months hence.

Andrew Ho
Andrew Ho
3 months ago
Reply to  bob

Why is this troll still allowed to post? Surely not because of the comedic relief?

Canosin
Canosin
3 months ago
Reply to  Andrew Ho

comedic side? possibly with the village idiot…… but its waste of time……even the lamest court fool would be by far more entertaining

David Chu
David Chu
3 months ago

Love that statue in the background!!! Mother Russia is coming into prominence with a big bang!!!

bob
bob
3 months ago
Reply to  David Chu

In ya dreams

She’s a one trick pony,being shafted by Putin and his criminal oligarchy

Padre
Padre
3 months ago
Reply to  bob

Criminal oligarchy is already in the states and Britain!

bob
bob
3 months ago
Reply to  Padre

Yeah i know run by the Queen

Canosin
Canosin
3 months ago
Reply to  bob

seems, someone has shoved something really big up your butt

Anti-Empire