Context:

Saudi Arabia has started an incredible price war with Russia by slashing its selling prices and pledging to unleash its pent-up supply onto a market reeling from falling demand because of the coronavirus outbreak.

Reasons behind Saudi Arabia’s move

• The turmoil comes after the implosion of the oil alliance between OPEC and Russia.
• Russia refused to go along with OPEC’s efforts to rescue the corona virus-battered oil market by cutting production.
• Russia’s refusal to cut production was aimed at piling up more losses on US shale oil producers, many of which need higher oil prices to survive.
• The failure of the Vienna meeting left the oil industry shell-shocked, sparking a 10% plunge in oil prices even before the Saudi declaration of war.

Can this damage the US shale industry

• The shale revolution was made possible by the combination of horizontal drilling and hydraulic fracturing (fracking).
• In the early 2000s fracking technology began to be broadly applied to reservoirs that had been viewed as being uneconomic for the previous 100 years or so.
• Along with this shifting of export and import polarity, came the sentiment that the U.S. was now the swing producer of crude oil and would quickly fill any gaps left by other producers.

OPEC

Background:

• The Organization of the Petroleum Exporting Countries (OPEC) was founded in 1960 by five countries namely the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
• They were to become the Founder Members of the Organization.

Members

• These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975), Angola (2007), Equatorial Guinea (2017) and Congo (2018).
• Currently, the Organization has a total of 13 Member Countries.
• The Statute stipulates that “any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization, if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members.