Streetwise Professor

March 8, 2020

There Will Be Blood

Filed under: Economics,Energy,Russia — cpirrong @ 6:59 pm

As a coda to the post on the bloodbath in oil. I remember how many Smart People claimed that Putin’s alliance with MbS’s Saudi Arabia was an act of strategic genius! Genius I say! The move of a 4 dimensional chess grandmaster. A move that went a long way to achieving Russian dominance in the Middle East, at the expense of the US.

Er, no. Like almost all of Putin’s moves, it was an act of short term opportunism, and one that was built on a foundation of sand (appropriate, given the locale). MbS was being equally opportunistic, and his and Putin’s short-term interests aligned. But cartels–and this was little more than a cartel with a little geopolitical gloss–are inherently unstable, and the interests of the colluders are inherently in conflict. Inevitably such condominiums collapse.


And so has this one. It was merely a matter of time, and what the proximate cause of the collapse would be.

There was no enduring alignment of interests that would provide the basis for a strategic realignment. There was a momentary alignment of interests between oil ticks. A market shock (extremely unexpected, no doubt) smashed the delicate structure to pieces.

The furious Saudi reaction to the Russian move demonstrates how fleeting Putin’s gains were. MbS is well and truly pissed, and looking to take revenge.

The only question that remains is: who will drink whose milkshake?

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  1. I’m no expert, but some Googling (including some sources I’ve never heard of, so I could be miles off the mark here) but here is my milkshake guess:
    – Saudi extraction costs are under $5/barrel, and they need about $55 to balance the budget.
    – Russian extraction costs are supposedly in the $40s/barrel and I don’t know what they need to balance the budget, but presumably about $10-20 more?

    So if we’re at $35-ish/barrel (with the possibility of lower to come), both economies are losing money and are eating into reserves/sovereign wealth. Then:
    – Even if the Russians cut all they spending they can, their economy will be losing not only the 10-20 profit that they were making per barrel, but also the cost of keeping the system running ($5-10/barrel… for now…). But not all that profit was going into useful endeavours anyway, and the non-oil economy will help, albeit the government spending cuts will hurt.
    – The Saudi non-oil economy barely exists, but I figure they’re only losing about $20-25/barrel in profits, but they are still making profits. So they could cut their way to solvency, but would the regime survive the resulting hardship?

    So which breaks first: The Russian economy or Saudi society? Hardy as the Russians undoubtedly are (in terms of their relative ability to bear spending cuts), the Saudi’s have about four times the Soverign Wealth (says Wikipedia). So for me, it’s no contest, the Saudi’s can hold out longer. But presumably Putin thought this through before pulling the trigger, so presumably he has left himself with an out – I certainly wouldn’t want to be up against him…

    Comment by HibernoFrog — March 9, 2020 @ 11:30 am

  2. Erratum: Saudi short-term marginal costs are under $5/barrel. Including capital investment (the number I should have used) they are supposedly in the 20s-30s. So lower than Russia, but not by much. Still, it means that the Saudis wouldn’t be making any profits and would have to dip into their soverign wealth harder than I thought. Maybe that’s why Putin feels he has can play hardball…

    Comment by HibernoFrog — March 11, 2020 @ 10:32 am

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