The costly Saudi-Russian oil wars

Friday 30/10/2015
Russia is facing a very grim out­look

LONDON - At odds over the war in Syria, Saudi Arabia and Russia are also locked in another conflict that could have severe glob­al economic ramifications — the war for energy supremacy.
The latest chapter in these pe­troleum wars has seen the Gulf kingdom cut through Russia’s Eu­ropean oil market shares, with the latest target being Poland. Saudi Arabia recently began selling crude oil in Poland, much to the chagrin of Moscow, which had tradition­ally dominated that market.
The head of Russia’s biggest oil company, Rosneft, said at a recent economic forum that the Saudis are “actively dumping, which is an element of the changes in world prices. Without doubt, the battle for markets is at this stage one of the key factors.”
“We have to make every effort to prevent a decrease in our share of supplies,” Rosneft Chief Executive Officer Igor Sechin said.
However, the situation is much bigger than just the Polish oil mar­ket. According to Reuters, global majors such as Shell and Total in Europe are cutting long-standing use of Russian crude in favour of Saudi grades.
“I’m buying less and less Rus­sian crude for my refineries in Eu­rope simply because Saudi barrels are looking more attractive. It is a no-brainer for me as Saudi crude is just cheaper,” a trading source with one major, who asked not to be named because he was not al­lowed to speak to the media, told Reuters.
Moscow has had designs on the lucrative Saudi-dominated Asian market for decades and in May succeeded in surpassing Saudi Arabia in terms of crude oil sup­plied to China, the region’s biggest market.
“This is all a fight for market share,” a Saudi oil executive who asked to remain anonymous told The Arab Weekly. “The probability of Saudi Arabia following the same oil policy, whether or not there was a conflict in Syria is very likely.”
The executive went on to say that taking into account the frack­ing boom in the United States and the fact that Iran hopes to increase its market share in the near future with the lifting of sanctions, Saudi Arabia has no choice but to follow this policy.
The battle for market share has taken a toll on both economies, with Russia facing a very grim out­look as a result. In the third quar­ter of this year, Russia’s economy contracted 4.3%, according to gov­ernment figures. This, according to analysts, is not only due to falling oil prices but also Western sanc­tions imposed on Moscow because of its actions in Ukraine.
Estimates by the World Bank in­dicate Russia’s economy is likely to shrink 3.8% overall in 2015, a big­ger drop than predicted. The bank said that, if the price of oil contin­ues at its current rate or less, the overall economy could fall 4.3%.
Reaffirming the bleak assess­ment is rating agency Standards & Poor’s, which recently said Rus­sia’s recession-hit economy re­mains weak, predicting it would expand by about 0.4% annually from 2015 through 2018.
Saudi Arabia has by no means gone unscathed in the process. With the fall in oil prices and a costly war in neighbouring Yemen, the kingdom has had to resort to cost-cutting measures.
The International Monetary Fund (IMF) recently recommend­ed that Gulf Cooperaiton Coun­cil (GCC) countries prepare their economies for what it labelled a “new reality” of oil prices remain­ing low for the foreseeable future, while also suggesting government spending cuts and income diversi­fication.
The IMF also highlighted that Gulf economies remain in a “strong position” to make necessary ad­justments, courtesy of large finan­cial reserves built up during years of higher oil prices. According to the IMF, the combined budget deficit for GCC countries over the next five years is estimated to sur­pass $1 trillion.
Furthermore, Bloomberg report­ed on October 8th that the Saudi Finance Ministry had issued direc­tives to government organisations to curb new spending initiatives. This also came with a freeze on new appointments and promo­tions and a general ban on the pur­chase of new vehicles or furniture, while also telling officials to speed up revenue collections.
In August, Saudi Arabia’s net foreign assets fell to $654.5 billion, the lowest since 2013, the king­dom’s central bank said.
But there is good news for Saudi Arabia as figures indicate that the goal of freezing US crude output growth is within reach. US produc­tion is almost back down to the November 2014 levels, when OPEC switched its strategy to focus on protecting market share.
“Their strategy is still working for them,” Miswin Mahesh, an ana­lyst at Barclays Plc in London, told the Washington Post.
“It means pain now, but in the medium-to-long term they will reap the fruits of a more balanced market, moderated shale supplies, growing demand for oil and ulti­mately a higher price.”