How Saudi Oil Policies Could Cripple Russia’s War Effort

The OPEC+ group, led by Saudi Arabia, plans to begin adding oil supply to the market as early as December despite evidence that oil demand growth this year would be lower than OPEC had initially expected.

OPEC has now revised down its estimates of global oil demand growth for the third consecutive month, expecting Chinese consumption to continue to underperform earlier projections.

Yet, OPEC+ now plans to add in December 180,000 barrels per day (bpd) to the market and to continue reversing throughout 2025 the current production cuts of about 2.2 million bpd.

There have been reports that OPEC’s top producer and the leader of the OPEC+ alliance, Saudi Arabia, has ditched its unofficial goal of bringing oil prices to the $100 per barrel mark and could be looking to “discipline” non-OPEC+ producers by returning to fight for market share.

This Saudi approach, should the Kingdom pursue it, could sink oil prices and, consequently, the oil revenues for the Russian budget.

Considering that oil and gas revenues account for around 30% of Russia’s budget proceeds, low oil prices could significantly dent Moscow’s revenues and its ability to continue pouring huge resources into the war in Ukraine, some analysts say.

Russian Oil Revenues

Low oil prices could be an even bigger drag on Russian budget revenues than the Western sanctions, which Russia is working hard to evade.

Moscow continues to find ways to circumvent the sanctions and is defying one of the latest measures, the blacklisting of dozens of oil tankers for carrying Russian oil, by putting around one-third of these back to work to deliver its oil.

The U.S., the EU, and the UK have so far explicitly designated 72 tankers for carrying Russian oil in violation of the sanctions or price cap. Of these 72 tankers, at least 21 vessels have loaded Russian oil cargoes since they were blacklisted, according to tanker-tracking data compiled by Bloomberg.
However, if oil prices were to drop materially amid ample supply, the revenue hit on Russia could be big.

“With Russia already selling its oil at discounted rates and with higher production costs, a low-price environment in oil markets may impact its ability to finance its aggression in Ukraine,” Luke Cooper, an Associate Professorial Research Fellow in International Relations at the London School of Economics and Political Science, wrote in IPS journal.

As oil revenues are very important for Russian state revenues, “oil is therefore both a source of power that has funded its war of aggression and a potential vulnerability, due to its sensitivity to movements in the global market price,” Cooper notes.

Saudi Oil Policy

The vulnerability could deepen should Saudi Arabia, a key ally of Russia in the OPEC+ pact, pursue a policy of taking back the market share it had lost over the past two years.

The Financial Times reported last month that the Kingdom could be willing to endure short-term oil price and revenue pain as it is making a U-turn in policy, going for regaining market share and ditching its unofficial $100 oil price target.

The last time Saudi Arabia waged a price war was in the early months of the pandemic in 2020, when the Kingdom and Russia battled for market share amid collapsing demand.

The Kingdom has been going above and beyond to restrict supply to the market for more than a year. Apart from its share of the OPEC+ cuts in force since last summer, Saudi Arabia is also voluntarily keeping another 1 million bpd off the market. It has been strictly sticking to its plan to produce “around 9 million bpd”—it has been consistently in line with its targeted oil output over the past year.

So, the Saudi frustration with losing market share while prices are stuck below $80 per barrel, even in the face of heightened geopolitical tensions, is no surprise.

If OPEC+ returns more supply to the market while demand has been undershooting initial expectations, by OPEC’s own admission, revenues for all petrostates – including Russia – will fall along with oil prices.

Is Russia Prepared for Low Oil Prices?

Russia, unlike the United States, has an oil-dependent economy, which benefits from the cartel power of OPEC+, Cooper wrote.

“Yet, unlike Saudi Arabia, its oil is not cheap to extract, making it poorly equipped to deal with low-price conditions,” the expert added.

Russia boasted 3.6% economic growth last year—well above the global average.

However, the number hides a gloomy reality, according to Stefan Hedlund, director of research at the Centre for Russian and Eurasian Studies at Uppsala University.

The explanation behind these rosy GDP indicators is simple: Russia’s current war economy, Hedlund writes in Geopolitical Intelligence Services.

“Large amounts of money are being funneled to contracting Russian soldiers, many of whom will be killed in Ukraine, and to the production of military hardware, much of which will be destroyed on the battlefield,” Hedlund said.

“Neither of these outputs can be justified in the long term.”

Russia itself is signaling it would be seeking to reduce its dependence on oil to minimize the impact of volatile oil and gas prices on its budget revenues.

A few years ago, oil and gas revenues made up 35-40% of Russia’s budget revenues, Russian Finance Minister Anton Siluanov said earlier this month, adding that this share is set to drop to 27% next year and to 23% in 2027.

Proceeds from oil and gas sales are the most important cash stream for Russia’s federal budget. The Russian economy will bear the brunt of a potential oil price collapse due to a new war for market share.

By Tsvetana Paraskova for Oilprice.com