Oil crash why saudi arabia has started a global crude price war

The oil crash of 2020 was a significant event in the global energy market, triggered by a combination of factors, including the COVID-19 pandemic, a global supply glut, and a price war between Saudi Arabia and Russia. Here's a breakdown of the events leading up to the crash and the reasons behind Saudi Arabia's decision to start a global crude price war:

Background:

  1. Global demand: The COVID-19 pandemic led to a significant decline in global demand for oil, as countries implemented lockdowns, travel restrictions, and other measures to slow the spread of the virus.
  2. Supply glut: The global oil market was already facing a supply glut, with production exceeding demand. This was partly due to the shale revolution in the United States, which had increased oil production in the country.
  3. OPEC+ agreement: In 2016, the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers, including Russia, formed an alliance known as OPEC+. The agreement aimed to stabilize the global oil market by coordinating production levels.

The price war:

  1. Saudi Arabia's decision: In March 2020, Saudi Arabia, the world's largest oil exporter, decided to increase its oil production by 1 million barrels per day (mb/d) to 12.3 mb/d, despite the global demand decline. This move was seen as a surprise, as it went against the OPEC+ agreement.
  2. Russia's response: Russia, which was also a key player in the OPEC+ agreement, refused to cut its production levels, citing the need to maintain its market share. This led to a breakdown in the OPEC+ agreement.
  3. Global price war: The price war between Saudi Arabia and Russia led to a global oil price crash, with Brent crude prices falling from around $60 per barrel in January 2020 to below $20 per barrel in April 2020.

Why Saudi Arabia started the price war:

  1. Market share: Saudi Arabia wanted to maintain its market share and increase its production levels to compensate for the decline in global demand.
  2. Revenue protection: The kingdom needed to protect its revenue, which was under threat due to the decline in oil prices. By increasing production, Saudi Arabia aimed to maintain its revenue levels.
  3. Competition from shale: The shale revolution in the United States had increased competition for Saudi Arabia in the global oil market. By flooding the market with oil, Saudi Arabia aimed to put pressure on shale producers and maintain its market share.
  4. Strategic move: The price war was also seen as a strategic move by Saudi Arabia to weaken its competitors, including Russia and the United States, and maintain its position as the world's largest oil exporter.

Consequences:

  1. Global economic impact: The oil price crash had significant economic implications, including a decline in global economic growth, increased inflation, and a rise in unemployment.
  2. Oil industry impact: The price war led to a significant decline in oil investment, exploration, and production, which had long-term implications for the industry.
  3. Saudi Arabia's economy: The price war had a significant impact on Saudi Arabia's economy, which is heavily reliant on oil exports. The kingdom's budget deficit increased, and its currency, the riyal, depreciated.

In summary, Saudi Arabia started the global crude price war in 2020 to maintain its market share, protect its revenue, and weaken its competitors. The price war had significant global economic and oil industry implications, and its consequences are still being felt today.