Experts say Saudi Arabia’s attempt to grab market share will hit the Kremlin’s finances.
If Saudi Arabia goes ahead with plans to increase crude oil production to protect its own position as the global oil kingpin, Moscow will not have enough funds to run its war economy, Politico writes.
Riyadh is increasingly frustrated by the failure of other petrostates to coordinate supply cuts to push oil prices to around $100. per barrel – from the current 70 dollars. Oil traders say Saudi Arabia is now ready to respond by flexing its muscles and changing plans for smaller producers, exporting more oil to capture market share and revenues even as prices fall.
This strategy could lower oil prices and be bad news for Russian President Vladimir Putin. Oil and gas have been the largest single source of income for the Russian state over the past decade, accounting for almost half of the country’s budget.
Mikhail Krutikhin, a Russian energy analyst based in Norway, said Saudi Arabia’s possible move poses a “huge risk” to Moscow’s state budget due to its huge dependence on oil revenues. And this is just one of several unpredictable factors on the horizon, including the US presidential election.
So we have to sit back and wait – stock up on popcorn,” he said.
In Saudi Arabia, “they understand perfectly well that Russian companies do not comply with demands to reduce production, so they are making their own plans,” Krutikhin added.
Alexander Prokopenko, an economist and fellow at the Carnegie Endowment for International Peace, agrees that the stakes are high for the Kremlin.
At the current exchange rate, a drop in oil prices of 20 dollars. will lead to a drop in income by 1.8 trillion rubles ($20 billion). This is equivalent to about 1 percent of Russia’s GDP, she said.
The government will be faced with a choice: either cut spending—which is unlikely during a war, Prokopenko added—or accept inflationary pressure and high interest rates.
Last week, the Financial Times reported that Saudi Arabia may abandon its long-standing ambitions to limit crude oil supply in order to raise prices to around $100. per barrel.
Oil market experts have little doubt that Saudi Arabia has huge production and export potential to instead change tactics and weapons to dominate the market due to volumes.
The global economy is quite sluggish and demand for oil is not as strong as the Saudis would like, said Ajay Parmar, director of oil markets analytics at ICIS, a commodity analysis company. Some producers, including Russia, are constantly exceeding their quotas, so this means prices are not approaching $100. per barrel, and Saudi Arabia is losing patience. This would be one way for Saudi Arabia to fire a warning shot to the market that they will act.
The message is as follows:
You guys need to step up, otherwise you will all be earning less because we will be gaining market share at a high price,” and if there is one country in the world that has the capability to do this, it is Saudi Arabia,” Parmar added.
Russia, along with countries such as Kazakhstan and Iraq, has been accused of supplying more oil than agreed to by the OPEC+ cartel, a collection of oil-producing states working to control global supplies and prices. Moscow has consistently exceeded its voluntary quota of 8.98 million barrels a day, despite promising again and again to bring production in line with the target.
Russia’s fossil fuel revenues also rose 41 percent in the first half of this year alone, despite Western sanctions imposed over the war in Ukraine, according to Moscow’s Finance Ministry.
President Vladimir Putin has vowed to continue extracting fossil fuels to support his country’s economy.
“Everyone has difficulties, and we have ours,” he admitted at an energy forum last week, “but Russia continues to be one of the leading participants in the global energy market.
Separately, Russia’s state news agency TASS reported on Thursday that the country was considering a new strategy to keep oil production at 540 million tons a year until 2050 – in an open challenge to efforts to cut production to combat climate change.
Russia has created a “shadow fleet” of outdated ships to transport its crude oil in defiance of the $60-a-barrel price cap set by G7 countries, and circumventing the restrictions has netted the Kremlin almost $25 billion since the full-scale invasion began.
Lazovka allows middlemen in countries such as Türkiye, China and India to refine Russian oil into gasoline and diesel fuel before selling it elsewhere without sanctions. Western countries spent $2 billion, according to a report first seen by POLITICO. for this rebranded fuel in the first half of 2024, providing the Russian state with enough tax revenue to attract an additional 6,200 soldiers per month to fight in Ukraine.
However, even if Saudi Arabia makes its move, the cash-strapped Kremlin is unlikely to back down in its war against Ukraine, despite having set its national budget on expectations that its oil will sell for around $70 a barrel, more than most are willing to pay.
Signs of economic imbalance are increasing, said Geli Simola, a researcher at the Bank of Finland, but “Russia will still be able to continue to finance the war for some time. The war will not end because Russia is running out of money.
Source: Racurs
I am David Wyatt, a professional writer and journalist for Buna Times. I specialize in the world section of news coverage, where I bring to light stories and issues that affect us globally. As a graduate of Journalism, I have always had the passion to spread knowledge through writing.