The costly Saudi-Russian oil wars
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.”