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Crude Economics
Saudis Fighting Russia for Europe’s Oil Market

Saudi Arabia is becoming a nightmare for Russia. First, the Saudis elected to abdicate their role as global oil swing producers, choosing not to cut production (and convincing the rest of OPEC to follow their lead) in the face of plunging crude prices. That decision consigned oil producers around the world to a period of prolonged bargain pricing, which has sent budget deficits spiraling in petrostates like Saudi Arabia and—you guessed it—Russia. And it doesn’t stop there. Reuters reports on Riyadh’s latest economic strike against Russia:

Russia has for years been muscling in on Asian markets where Saudi Arabia was once the unchallenged dominant supplier. But now Riyadh is retaliating in Moscow’s backyard of Europe with aggressive price discounting.

Trading sources told Reuters that majors such as Exxon, Shell, Total and Eni have been all buying more Saudi oil for their refineries in Western Europe and the Mediterranean in the past few months at the expense of Russian oil.

Riyadh’s strategy has been predicated on a belief that market share is more important than a robust oil price, and that’s perhaps being vindicated in Europe, where Saudi supplies are starting to edge out Russian crude. Putin has to be feeling the pressure as Western sanctions prevent him from investing in the kinds of new projects necessary to keep Russian oil production up in the medium-term future, even while low prices deplete a Russian national budget that has become very dependent on revenues generated by hydrocarbon sales. And now, between Saudi discounting and the continent’s recent push to diversify away from Gazprom supplies after the conflict in Ukraine, Russia is losing its grip on its most important customer base: the European market.

This continental clash is only going to intensify when Iranian oil exports start to come back online, pending the lifting of Western sanctions. In the meantime, Russian and Saudi energy officials have scheduled a meeting next month to discuss the current market climate. Rest assured they’ll have plenty to talk about.

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  • Pete

    Saudi Arabia a nightmare for Russia?

    Maybe. But it that was literally so, then Moscow could come out of its bad dream by having Riyadh disappear in a cloud of radioactive dust one afternoon.

    And what would the U.S. do about that, go to nuclear war with the Ruskies? I don’t think so.

    • Jim__L

      A lot of people (me included) would be very surprised if Putin went straight for the nuclear option. Best to keep our eyes open to see if a Russian presence in Syria becomes a Russian presence in Egypt, some of the Emirates, etc.

      It’s fascinating to see where all the pieces lie in the 21st century version of the Great Game. I hope Via Meadia puts together a picture of how Russia relates to all the Middle Eastern countries, as the Syrian crisis enters its new phase.

  • Andrew Allison

    Mirabile dictu! A post which recognizes that “Riyadh’s strategy has been predicated on a belief that market share is more important than a robust oil price, . . .”, and doesn’t mention shale.

  • Roy Lofquist
    • Jim__L

      Wow, some of those are just plain weird. Iceland and Greenland, net exporters? Most of Europe, neutral or trending exporter?

      Of course, Dutch Disease could explain the trend in the oil exporters… it’s not clear to me that agricultural reinvestment is impossible in oil exporters with actual arable land.

  • AaronL

    Russia will play the balancer the way Britain once did on continental Europe. Right now Russia is helping it’s Shia allies, Iran, Assad in Syria, the Shia in Iraq. Putin is using this to get his sphere of influence and increase his power in the Middle East. He is also using it to leverage the Europeans, i.e. he is saying to the Europeans -“Give me what I want in Crimea and eastern Ukraine and drop the sanctions against Russia and I won’t send a flood of millions of Syrian refugees to Europe”. The Europeans will give in. Once he’s built the Alawite mini-state in the Latakia province and preserved his naval base there, and secured his Iranian and Iraqi allies, and destroyed Islamic State he’ll say to Saudi Arabia ” If you want me to rein in the Shiites ,( i.e. Iran and it’s Arab Shiite allies) than allow the price of oil to rise to what it was before 110 USD per barrel” . He’ll maintain the balance of power between the Shiites and the Sunnis, wipe out Islamic State, have $110 per barrel oil, own Ukraine, weaken the EU and NATO, increase Russia’s relative importance in the Sino-Russian alliance and in so doing make all of the Eurasian landmass a Sino-Russian sphere of influence, and then start looking for new worlds to conquer.

    The next American President will have to try to clear up this mess. Frankly , I think it’s reached the point of no return.

    • rheddles

      After he secures his Mediterranean position, he says to the Iranians, time to liberate your Shiite brothers in eastern Saudi Arabia where a lot of oil production lies. Even if you don’t we can trash the oil facilities and constrain supplies.

      The problem with getting to $110/bbl oil is fracking and the more enlightened Mexican attitude toward foreign investment and partnership.

      Russia and OPEC’s problem is that there is no longer a floor on the price of oil and there is a ceiling.

      While Obumble is an idiot, he is occasionally correct, if only by accident. Russia is playing a relatively weak hand extraordinarily well aided by Obumble playing a relatively strong US had extraordinarily poorly. That won’t last forever on the US side.

  • Omar Fhad

    putin go to the bed
    stop dreaming about high oil price and market share

    written by one man from SA

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