Why Russia is playing oil price hardball

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Saudi Arabia is pushing for a new global oil output agreement with Russia and a consequent stabilization of prices. But while he’s open to such a deal, Vladimir Putin sees opportunity in playing hardball.

Oil prices have crashed amid a recent failure of Saudi and Russian officials to reach an agreement that would reduce the current global oil glut. In response, Saudi Arabia has increased its output, sending prices even lower. But under Trump administration pressure, the Saudis this week signaled a new openness to a deal with Russia that will stop the overproduction. Such a deal would entail Saudi and OPEC acceptance that Russia be allowed to sell more oil proportionally on global markets than other nations. That’s what Putin wants most: a deal that maximizes his oil revenue (absolutely critical to Russian government revenues) and ensures Russia’s political dominance of all the major non-U.S. energy producers.

Yet the Russian leader doesn’t want to cut a deal too quickly. While he needs the foreign capital from oil sales to pay for basic services at home, unlike democratic leaders, Putin’s autocratic power allows him to sacrifice public needs in pursuit of his own larger agenda. This is also true of his response to the coronavirus pandemic. And this enables him to focus on playing hardball in pursuit of two other objectives.

For a start, Putin wants to use the current collapse in oil prices to destroy U.S. fracking — a threat to Russia’s energy strategy as it puts an effective price cap on global energy prices. Various Western politicians, including top Democrats, have called for bans on fracking, which would give the Russians everything they want. But for now, shale producers are forced to idle when prices are this low, as their break-even is higher than conventional oil producers.

But the U.S. shale industry is resilient and can bounce back from any period of idleness. Indeed, just last week, Russia’s energy minister openly lamented that American shale producers are able to survive even bankruptcy. Putin thus wants to do all he can to put pressure on these producers and destroy them.

Putin’s second consideration is that he wants to show Saudi Crown Prince Mohammed bin Salman who is boss.

Putin sees the young Saudi leader-in-all-but-title as a linchpin for his long-term strategy to usurp American political and economic influence in the Middle East. Happily closing his eyes to regional regime human rights abuses, and using his Syria intervention to boost his credentials as a reliable power player deserving of regional patronage, Putin has made steady progress strengthening Russian influence in the Middle East. But Putin also knows that if bin Salman is able to resist him with confidence, to succeed in this current showdown, Russian influence will steadily decline in American favor.

In turn, Putin is banking on the Saudis becoming desperate for an output deal in order to consolidate their own revenue streams. And if he can get bin Salman to beg for a deal, Putin feels he’ll have won a major influence battle that will be of great use in the future.

Ultimately, we should expect a Saudi-Russian deal. But not quite yet. Not until Putin has tried to make the shale producers and Saudis sweat a little longer.

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