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International Security Implications of the US-Russia Contention Over the Nord Stream 2

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The Nord Stream 2 gas pipeline has been a subject of heated debates all along the construction cycle. The pros and cons are abundantly exposed in the public domain and have been at the centre of technical and political discussions for several years. The project comes amid a wide range of comments and statements on the high political level, involving leaders of Germany, Russia, the United States and the European Union. The polemic around the Nord Stream 2 takes place in a particular context marked by the growing tensions between Russia and the West and recurrent security incidents in the East of Ukraine and the Crimea area. Those factors add further to a tendency to overemphasize political and security dimensions of the Nord Stream 2. Consequently, the project has been associated with far-reaching strategic implications. Referring to the opinions expressed by politicians and experts on both sides of the Atlantic, Western media have represented the pipeline construction as infringing on the NATO interests in the region and frustrating the unity of the European nations. The pipeline has also been presented as laying the ground for Russian military offensive into its European neighbourhood. This has created quite an exceptional environment for a project which was designed merely as an extension of the already existing pipeline route (Nord Stream 1). Indeed, the project could hardly be viewed in ‘normal circumstances’ as a very new element in, or a substantial change, to the European energy and security landscape.

Making an extra argument in favour or against the project will not be the objective of this article. What it will, however, try to explore is to what extent the contention around the Nord Stream 2 may interfere with existing security balances in Europe and how far it can impact strategic security relations in a triangle formed by Russia, the EU and the USA.

On the one hand, the developments around the Nord Stream 2 are quite similar to those which accompanied earlier projects of hydrocarbon transit from Russia to Europe, starting from the Nord Stream 1 and back to the Cold War times. This can be noticed by looking at the international reaction to the project. Indeed, many arguments currently advanced against the Nord Stream 2 have already emerged at the order of the day on several occasions. The narrative is commonly constructed along the lines of Europe’s energy vulnerability and its dependence on external energy supplies, from the Cold War era “red oil” threat to later Soviet and now Russian gas dependency. Ten years ago, the opponents of the first Nord Stream pipeline put on the table almost the same points of criticism. They considered the project as an attempt to bypass traditional transit countries, exert political and military influence on them, gain strategic dominance over Europe.

The diplomatic and political manoeuvres around the Nord Stream 2 are also not entirely new. Back in 1962 (a time when oil and not gas was the main product in energy trade relations between the USSR and Europe) NATO countries introduced a US-proposed embargo on oil pipes and connected technology for the Soviet Union. This strategy was enacted as an attempt to delay the construction of the pipeline named Druzhba (the Russian for ʻfriendshipʼ) intended to bring the country’s oil to Europe. Further embargo on pipeline technologies was implemented in the early 1980s by Ronald Reaganʼs government. The measure was supposed to prevent the construction of the Soviet export gas pipeline Urengoy-Pomary-Uzhhorod, in which several European companies and banks had a stake. For these past events, various features of the European and transatlantic policy were quite similar to the present times. The division of Europe into supporters and detractors of the pipelines from Russia, US and NATO attempts to block Russian energy deals with the European companies, and the national governments’ subjection in international affairs to the energy majors’ strategies, do not sound like anything new. Thus the actual contention over the Nord Stream 2 is inscribed into the longer-term turbulent history of the Russian hydrocarbon transit projects in Europe.

On the other hand, today’s context is different, and there are mainly two new elements which account for the change. First is that the world has entered a new historical period, security-wise far less structured, predictable and manageable than the Cold War times and even the post-Cold War era. Dramatically reduced level of trust between the USA and Russia, coupled with the harsh rhetoric of their leaders and continuous mutual accusations raise the conflictual potential in the bilateral relations. US-China competition over trade and economic leadership adds to further international complexity. The growing number of actual and potential military conflicts, including hybrid ones, brings about a higher risk of escalation with unpredictable consequences. Serious concerns hover over disarmament and non-proliferation regime, with its significant components fallen apart or remaining in limbo. While the demise of the time-proved mechanisms aimed at conflict prevention may be traced back to 2002, when Washington’s withdrew from the Anti-Ballistic Missile treaty (ABN Treaty), the recent developments, mainly the US decision to pull out from the 1987 Intermediate-Range Nuclear Forces (INF) Treaty and Russia’s suspension shortly after of its own compliance with the pact, have put the finishing touch to the arms control and disarmament agenda of the whole post-Cold War era.

In such a context, armed conflicts are likely to break out or grow in intensity along one of many existing fault lines. The cross-border energy projects also turn into dividing factors within the current confrontational conjuncture. Consequently, North Stream 2 has got the potential to impact the European geopolitical scene profoundly.

The second new element pertains to the US domestic hydrocarbons production and the way it strains the competition for the European gas market sharply. Only about a decade ago, the United States was supposed to become the largest importer of liquefied gas. However, the shale revolution brought about a sharp increase in domestic gas production. Paradoxically, the infrastructure previously designed to import LNG to the USA was used later on to export gas. That contributed to a significant reduction in the cost of American LNG projects compared to similar endeavours in other countries (Qatar, Australia and Russia). By 2020, the production capacity of the six existing US LNG plants reached about 78 million tons, and the United States is now quite able to outrun Qatar in production volumes (this is apart from being currently the world’s leading exporter of refined oil products).

Meanwhile, domestic gas production in the European countries accounts today for less than 50 per cent of domestic consumption. The demand for imported gas is growing. Over the past six years, gas supplies from external sources have increased by an average of almost 4 per cent annually. In 2018, European countries imported 326 Bcm of gas, 4.8 per cent more than in 2017. In the first half of 2019, the total net gas imports in the EU amounted to 210 Bcm, which was 19 per cent more than in the first half of 2018, amid increasing consumption (+4.5 per cent) and decreasing domestic production (-7.6 per cent), pointing to further increase of gas import dependency in the EU. Russia remained the top pipeline gas supplier of the EU, covering the major part (almost 45 per cent) of total extra-EU gas imports.

The approximate market share volume in Europe for the US gas producers may potentially elevate up to 60 – 80 billion cubic meters, but only if supplies from Russia are effectively restricted. Because of the hurdles which the US LNG may face on the European market due to the growing competition with the cheaper pipeline gas from Russia, its export may find itself limited only to the markets of the Asia-Pacific Region and Latin America with only a marginal proportion going to Europe. That explains the rationale behind some non-market restrictive measures, or sanctions, which serve as an instrument to sideline the competitor and politically facilitate American LNG flows toward Europe. President Trump and high officials of his administration expressed on various occasions their opinions on the North Stream 2 project, which oscillated from lukewarm to overtly adverse. The US ambassadors in Berlin and the Hague overtly pressured local governments and private companies to reconsider their support for or involvement with the pipeline. In June 2019, the US House of Representatives’ Foreign Affairs Committee approved the Protecting European Energy Security Act, a bill which would impose sanctions on anyone who sells, leases, or provides pipe-laying vessels used in the construction of a Russian-origin energy pipeline that makes landfall in Germany or Turkey. A month later, the US Senate Foreign Relations Committee advanced the bill that would impose sanctions on the Nord Stream 2 as an effort to “protect European energy security and Ukraine’s stability”.

Finally, on December 20, 2019, the US President signed a sanctions package on the Nord Stream 2 and another offshore pipeline designed by Moscow, Turkish Stream (also called TurkStream). As an immediate effect, the Swiss-Dutch company AllSeas in charge of laying the pipes in both projects announced its withdrawal from the Nord Stream 2, causing presumably a one-year delay to its completion.

The surplus shale oil and gas production in the US has impacted the governmental approach toward diplomacy. Ever since the 1970s, Washington had criticized the use of energy as a political instrument; however, once the self-sufficiency was achieved, energy sanctions have become the tool of choice for American foreign policy. This new role of the US — that of the ‘energy hegemon’ — will likely have several effects on the transatlantic relations and international security.

First of all, overusing sanctions in the energy domain would affect the supply security of the EU countries and necessitate some innovative safeguards against further deterioration. A situation when almost all non-US sponsored energy supply projects in Europe may face fierce American opposition on political grounds is constraining for actual and potential investors into hydrocarbon transit business. As long as the US economic interests find their way in Europe under the guise of political considerations, the stakes of the European companies involved in the Nord Stream 2 (or other energy projects with Russia or Iran) will remain at risk. That kind of setting may result in a broader awareness within the EU about the diverging political priorities of Washington. It is also possible to expect the elaboration of some specific measures aiming to mitigate the effects of the US sanctions on what Europeans see as their legitimate business and security interests. It should be noted, that the big question is whether the EU will have enough of united political will and capacity to take a course of action that goes against the attitude of its central political and commercial partner, the US. However, the ongoing discussions in Europe about the de-dollarisation of the energy products trading, as well as some attempts made by France, Germany and the United Kingdom to set up a special purpose financial vehicle (INSTEX) to facilitate trade with Iran, are some early examples of a search for greater autonomy.

Secondly, fierce US lobbying against the Nord Stream 2 stokes tension to an already complex and sometimes explosive European security landscape. The US and some Eastern European countries used to strengthen the arguments against the project by stressing its linkage with the ongoing conflict in Ukraine. It purportedly followed therefrom that the raison d’être of the North Stream 2 was to slowly strangle Russian neighbour’s economic and political capabilities, particularly by causing Ukraine to lose around 2 billion euro annually in gas transit fees when the new pipeline becomes operational.

However, by the end of 2019 Moscow and Kyiv reached a new five-year agreement on Russian gas transit through Ukrainian territory. Ukraine got the supply volumes it wanted: 65 billion cubic meters in the first year, and 40 billion the next year. In the absence of the Nord Stream 2, delayed by the US sanctions, Gazprom might have to supply some 75 Bcm through Ukraine in 2020.

Nevertheless, the critics of the project are already extending the strategic implications of the pipeline to the Baltic area. The standard argument here is that the pipe would give Russians a pretext to patrol the entire Baltic sea, as well as provide infrastructure for information transmission and for tracking the movement of naval vessels. From that reasoning follows that adequate countermeasures need to be designed and implemented by NATO in order to prevent a “blow” against security in Eastern Europe. As a consequence, the whole area is getting locked in a highly conflictual conjuncture aggravated by already existing regional security challenges, such as the demise of the Intermediate-Range Nuclear Forces Treaty and the ongoing military buildup on the NATO’s Eastern flank.

Thirdly, the recurrent difficulties in involving Europeans into sustainable and smooth economic partnership in the gas sector, as well as the American sanctions which could eventually apply to any additional lines to the Russia-sponsored pipelines in Europe, incentivize Russia to reconsider the geometry of its energy export routes. The deliveries of Siberian gas to China in the amount exceeding 1 trillion cubic meters in 30 years began via a new trunkline — ‘the Power of Siberia’, with the annual capacity of 38 Bcm . The reorientation of substantial gas volumes toward the East is a sign that the former Cold War allies seem to be on the way of upgrading their relationships while trying to fend off escalating pressure from the West. Washington clearly designates Russia and China as US strategic rivals, and this precipitates both countries to cooperate on a broader range of issues, like energy and related infrastructure, international security and domestic governance. With all the limitations which an alliance between Moscow and Beijing may face, this it is likely to become a consequential factor of the strategic landscape in Eurasia and beyond.

Fourthly, the growing US pressure both on Russia and on Europe to stanch the Nord Stream 2 construction causes discords within the EU and is likely to rebound badly for the European political unity already put to the test by many economic and security issues. The controversial reputation of Donald Trump’s international policymaking could pose a problem to those EU member states that follow American president in warning against the project. On the contrary, those who support the Nord Stream 2 or stay neutrally favourable toward it, are likely to be in a more advantageous position by representing their attitude as resistance to external pressure and uncompromising defence of national and European interests. The German’s pattern of political conduct fits well into this framework. Berlin supports the pipeline construction (regarded primarily as a business project) and defends it as a contribution to national economic development and secure energy supply for Europe. In a way, Germany has revealed the limits of pressure that President Trump is prone to exercise on the US allies and adversaries alike. What is happening proves that applying coercion, or just evoking it publicly, can bring about the opposite effect. That holds true for the Nord Stream 2 which has got broad public support within German society, and is now championed both by major ruling political parties in the current CDU/SPD coalition as well as three parties of the opposition: the far right AfD, the liberal FDP, and the extreme left, die Linke. The same holds in other cases as well. For instance, another President Trump’s favourite subject of anger concerning Germany is its defence spending. However, pushing Berlin into increasing it up to 2 per cent of its GDP makes it extremely difficult to do so. On the one hand, existing polling data proves that Germans oppose defence spending above the 1.5 per cent of GDP, already promised by Angela Merkel by 2024. On the other hand, hardly any politician in Germany wants to be seen succumbing to Trump’s overt forcing. Although there is no direct link between the German involvement with the Nord Stream 2 construction and its vision of the defense spending obligations, the underlying factor on both accounts is compelling American demand for clear-cut solutions to the issues, which turn out to be much more nuanced from the German standpoint.

The overemphasized political and military dimensions of the Nord Stream 2 increase pressure on the strategic relationship between Russia and the West. The anti-Russian rhetoric fans the continuous contention around the project in the American and European mass media. The moment when it happens is all the more inopportune, taking into account the deteriorated security environment in Europe which moves closer to the untrammeled arms race with the demise of the INF Treaty and the uncertainty about the future of the New START — one of the last pillars of the arms control regime. International energy supply projects have become — nolens volens — closely intertwined with political and security developments, be it escalation between the US and Iran at the Strait of Hormuz — a vital shipping route linking Middle East oil producers to global markets — or the simmering conflict in the East of Ukraine, in the vicinity of a transit corridor for Russian gas exported to Europe. Being a constant element of the strategic picture, energy is more and more regarded as a dividing factor which serves the interests of one party to the detriment of the other. The application of this conflictual paradigm to the Nord Stream 2 gives rise to yet another fault line amidst already strained European political and security environment.

Paradoxically, with the Nord Stream 2 contention, the very concept of energy resources supply and sharing acquires a confrontational connotation in Europe. Whereas, the same idea was underlying regional integration back in the mid-20th century. The European Coal and Steel Community (ECSC) established by the Paris agreement in 1951 was intended to neutralize competition between European nations over natural resources and prevent further war with Germany. The visionary idea behind the transnational community implied that amidst dramatic lack of trust toward a particular country the best way to avoid conflict and to restore confidence was to involve the distrusted state into a large-scale energy project. Unfortunately, subsequent historical developments on the European continent resulted in a situation where the idea of promoting extended energy partnership as a pledge of lasting peace seems no longer attractive. The Nord Stream 2 case demonstrates quite clearly the lack of collective will on behalf of the European Union to engage on a long-term basis with its Eastern neighbour in the gas sector. Keeping in mind the limitations of any historical analogies, back than the ECSC represented a political option in dealing with a nation which was suspected of seeking regional domination. In the modern days, rather than making out of the Nord Stream 2 another squandered opportunity for building a more sustainable relationship with Russia, the West, and primarily the EU as a close neighbour, could have looked at the pipeline beyond its primary function of one-way gas supply. The connecting gas artery might also serve to send something back from Europe toward Russia, albeit in a virtual sense, like a better understanding of European priorities and concerns, trust, and a vision of a shared future. The project could have also been viewed as a safeguard against presupposed Russian military invasion into the countries of the EU Eastern periphery. The possible damage to the pipeline which would provide significant and much-needed export revenues for the national economy is a convincing disincentive for Moscow to mount some dubious warfare operation in its neighbourhood. However, this perspective was not able to make its way through alarmist rhetoric which depicted the Nord Stream 2 as a part of Russia’s sinister designs. The same reasoning certainly reinforces the aggressive image of Russia and gives additional sense to NATO’s raison d’être. At the same time, it leaves Moscow disenchanted with the European partners, locks the country out in a reactive posture and makes look for strategic alliances elsewhere.

Finally, the US-Russia contention over the Nord Stream 2 is likely to take a toll on the transatlantic solidarity. The trends going in that direction are gaining strength driven by the specifics of the current American foreign policy. It would be premature to argue that the European elites are ready to break ranks with Washington. However, on several issues, such as the nuclear deal with Iran (JCPOA), Middle East policy, the role of NATO or relations with China they show increased independence and greater consideration of their national interests. The way things will develop for the Nord Stream 2 will be partly determined by the unfoldment of the debates over the greater European strategic autonomy from the US. However, even if the outcome of these debates tilts the balance in favour of the Nord Stream 2, it is difficult to predict for how long that could last. The European position regarding the project has indeed proved to be a complicated, precarious symbiosis between internal strategic concerns, imposed security frameworks and economic motivations.

From our partner RIAC

[1] As Roberto Cantoni notes, those were not the only USA-proposed blockades aimed at hindering Soviet industrial projects: “…In 1946, a penicillin plant program launched by the United Nations Relief and Rehabilitation Administration to build up the capacity of the pharmaceutical industry in Eastern and Southern Europe was significantly delayed by an American embargo on extractor technologies. The State Department refused to grant export licenses for the necessary equipment to pass the Iron Curtain. Other products including radioisotopes and computer equipment were also embargoed to stifle Soviet technological progress”.

[2] Among the primary factors driving gas demand growth in Europe are the decline in domestic production, reduction in nuclear generation, and the decreased role of coal in the energy sector. Within the EU, the gradual capping on the extraction from the major Dutch Groningen gas field resulted in the production downturn of a magnitude similar to the increase of Russian gas imports (both roughly 40 Bcm).

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Energy

MBS Outmaneuvers Russia’s Oil Politicking

Saad Khoury

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In the wake of the coronavirus outbreak, one of the major economic consequences has been the substantial hit to the energy industry.

Ever since the virus began to spread in January, global markets have been tumbling. This set the price of oil in a downward spiral, reversing many gains  that had accumulated over the last several months. Demand for oil dropped for the first time in over a decade and forecasters at the International Energy Agency assess the decline will continue. While natural gas and coal markets have also been hit, oil demand has dropped more pronouncedly given it supports the freight and logistics sectors that have ground to a halt in recent weeks. The lack of demand for oil in China alone has had a devastating impact – Beijing’s newfound hunger for the commodity was responsible for most of the price increases recently.

However, these unique phenomena have had effects far beyond the purely economic. Politically speaking, the oil market crisis has pitted two global energy giants against each other, producing very intriguing results.

In early March, a meeting took place between the Organization of the Petroleum Exporting Countries (OPEC) and ten other oil-producing countries, known as “OPEC+”. During the conference ending on March 6, Saudi Arabia’s leader, Prince Mohammad Bin Salman Al Saud (MBS) reportedly pushed the idea of coordinating a reduction of output between Saudi Arabia and Russia. MBS planned to reduce output by over 1 million barrels per day, offsetting the major decrease in demand that had been triggered by the corona crisis to stabilize the market. The plan seemed like it was ready to go through until Moscow announced at the last minute that it would refuse. The Kremlin’s about-face came as a shock to OPEC and the international community who saw the move as an attempt to torpedo and politicize the oil sector.

Indeed, oil prices plunged by nearly 10% following the surprise move. It had been widely expected that the Russians would go along with the plan, simply because the alternative, i.e. leaving oil markets in a high-supply-low-demand frenzy, seemed much worse.

So what was at the heart of Russia’s bizarre decision? Revenge.

Washington imposed sanctions on Russia’s oil giant, Rosneft, a month ago over the company’s continued support in selling Venezuela’s oil. In an effort to retaliate, and perhaps prevent future American sanctions, Moscow was hoping to get Riyadh on its side in a plan to inflict economic pain on US shale producers. Moscow has for long felt American shale has been getting a free ride on the back of OPEC+ production cuts. For Moscow’s plan to work, it would still need the support of OPEC+ to ensure that price drops remained temporary and sustainable, since Russia’s oil economy cannot support its country playing oil politics for too long or for too much.

MSB on his part refused to take Russia’s actions lying down.

Almost immediately after Russia’s decision, Riyadh cut its official selling price for April down to $8, from a previous $14, in an effort to pressure Russia back into a deal. Days later, the Saudi government said it would begin increasing oil output to reach a record 13 million barrels per day. The decision came after authorities had already announced they were planning to increase output to 12.3 million. In a statement, Saudi Aramco, the largest energy producer in the world, stated, “it received a directive from the Ministry of Energy to increase its maximum sustainable capacity from 12 million barrels per day to 13 million.”

In essence, MBS has outmaneuvered the Russians in their attempt to hurt the global market and circumvent the effects of sanctions. In other words, MBS called Russia’s bluff by lowering prices even further so that the Kremlin could not dictate terms to OPEC. An impressive example of standing up to Russian manipulation, something that Western powers have been struggling to do for years. 

Russia on its part has been reeling from the effects of the Prince’s decision. 

On March 10, Russian Energy Minister Alexander Novak sought to project confidence, but acknowledged there was a decrease in prices and an increase in volatility. Novak also seemed to have admitted that his government made a mistake and had sought to reach out to the Saudis to “scheduled further meetings to estimate the situation.”

It is important to highlight that Russia was very likely thrown off balance by the Saudi reaction here. Moscow is not used to having its highhanded moves being responded to in kind, and almost certainly did not expect MBS to respond the way he did.  

While the future of this fallout is still unknown, one thing is certain: MBS has demonstrated his country will not be another pushover to Russian aggression.  

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Saudis’ price war or a Russian plot against U.S. shale?

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Since early Monday, the announcement of a “price war” between Saudi Arabia and Russia, two biggest OPEC+ allies, hit the headlines of almost all of the world’s news agencies and outlets and released a wave of panic across the markets all around the world.

Following the two sides’ bitter break up on Friday, oil markets started the week with a free fall; prices plunged nearly 30 percent on Monday to record the sharpest one-day fall in the past 29 years when the first Persian Gulf War was started in 1991.

Brent crude futures fell to nearly $30 on early Monday, the prices, however, bounced back later that day as the impacts of the event faded.

Energy experts and analysts are suggesting two completely different scenarios to explain the series of events that led to the Friday decision.

In one scenario, the one that is broadcasted globally, Saudi Arabia which wanted higher prices or at least wanted to maintain the current price levels asked for more cuts but Russia was OK with the current prices and even was ready for lower ranges so they didn’t agree and the OPEC+ deal ended.

The second scenario, which is more intriguing and more controversial, says that there is no “price war” between Saudi Arabia and Russia, and what we are witnessing is, in fact, Russia declaring war against the U.S.’s “global energy dominance”!

To learn more about the issue, the Tehran Times conducted an interview with Mahmoud Khaqani, an international energy expert. What follows is a summary of the expert’s views on the matter.

Saudis and Russia

Obviously, these days Saudi Arabia is not experiencing its best days. The Kingdom is under pressure both economically and politically.

According to Khaqani, the plunge in oil prices due to the sharp decline in global demand following the spread of coronavirus and its impact on the global economy and transportation has added significantly to the crown prince’s problems causing the young prince to call for deepening of the current 1.8 million cuts.

When faced with disagreement from its biggest non-OPEC allay Russia, the angry Saudi immediately lashed back by offering huge discounts for their oil prices and announcing that they would boost their production to more than 12 million barrels per day (bpd).

Russia, on the other hand, has maintained a calm attitude, saying that its oil industry is resilient enough to keep its market share and withstand even higher price downturns, he said.

Russia and the U.S.

Khaqani believes that the Russians are in fact at war with the U.S. oil industry, and Washington’s use of oil as a strategic asset.

What they call “price war” has already hit the U.S. oil industry hard since Friday and the persistence of the situation could damage the U.S oil industry and dethrone the U.S. from its position as the world’s largest oil producer.

Russia has targeted not only the U.S. oil industry but also the country’s bigger strategic programs for using oil and energy as leverage for applying corrective sanction policies, which Kremlin is already under.

Analysts believe that Russia is trying to thwart the U.S. sanctions that have been intervening with the completion of the country’s Nord Stream 2 pipeline project, which would take natural gas to Europe, making Russia one of the biggest energy players in the world.

The U.S.

In response to the mentioned scenarios, The U.S. Department of Energy (DOE) has said that the U.S. will take all necessary measures to maintain its role as the world’s top energy producer and in fact, the country is not going to step back from its “global energy dominance” strategy.

Khaqani believes that the U.S. is seeking to take Saudi Arabia’s role in the oil market becoming the new swing producer capable of regulating production levels to control oil prices.

“These attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world. The United States, as the world’s largest producer of oil and gas, can and will withstand this volatility,” the DOE said in a statement.

Final thoughts

Whatever the real reason for the rift between Saudi and Russia is, its impacts on the oil market are undeniable.

If the “war” is just between the kingdom and Russia many believe that the impacts will be short-lived and in the near future, we would witness the markets getting back to a more stable status.

The fact is that now after the break-up Saudi Arabia is going to flood the already oversupplied market with oil and eventually Russia which is not able to increase its production as much as the kingdom will have to step back.

If the second scenario is correct, however, we should expect more complications.

From our partner Tehran Times

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Oil Wars: Russia and Saudi Arabia in the forefront

Sisir Devkota

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Recent developments in Italy and the stock market have things in common. Both came as an alarming surprise; while Italian authorities took stringent measures to lock down the entire nation due to Covid-19 fears, oil prices plunged remarkably in the past week. Rather shamelessly, Russia and Saudi Arabia are exploiting the international epidemic; in order to eclipse a once in a lifetime opportunity. As Saudi Arabia and Russia fought against each other to increase production, oil prices spiraled down in years. The oil giants are looking to consolidate losses from the past. Primarily, both the nations are looking to keep American oil supply arrested, amidst the pandemic uncertainty. As OPEC nations agreed to limit production in order to maintain oil prices, Russia disagreed, prompting the kingdom to counter a bizarre monopoly. The virus has kindled new age energy wars; at the epicenter, are two nations, displaying dreadful nature of international responsibility.

History is key here. Saudi Arabia is sluggishly recovering from an oil field disaster while Russia is eyeing years of forfeited trade advantage caused by western sanctions. International effort is concentrated towards containing the virus, whereas handful of interest agencies along with both nations are seeking an unlikely triumph. A true windfall has caught Russia by surprise, a rare opportunity that will not slip from Putin’s hand. On the other hand, Saudis, rather egoistically are pursuing their godsend place in the international energy market. The scuff is undoubtedly interesting, however; consequentially, it will also determine fortunes for some and famine for others. OPEC’s decision to lower production in order to maintain current oil price is not a samaritan effort; nevertheless, it would have saved capital over-indulgence that could have instead concealed humanitarian efforts to contain the pandemic. For now, management is key and stock market health can prove to be momentous. A lively market is key to ward off unprecedented economic stress.

Russia and Saudi Arabia’s naivety has led to extreme stock market resistance. The world is watching the fight closely, waiting and hoping for the standoff to deflate. It is not the stalemate that is most worrying; unusual market activity is quietly manufacturing an enormous bubble waiting to crack. Market resistance is tipping at a dangerous degree; world markets are sincerely counting on each other for support. For instance, consider how markets would plunge lower than they otherwise would, as oil prices keep decreasing uncommonly. A sinking ship is resisting, waiting for water levels that can only drown by all rationality. Hence, the analogue.It would have taken Russia and Saudi Arabia a great deal of conscience to withdraw national interests for the sake of global welfare. Just in case the virus does not cease to pare, we are in for a truly global disaster. As more nations will testify infected population, the stock market will increasingly face nervous breakdowns. Then after, it will be impossible to guess directions.

Reduced oil prices will complement some and destroy others; the relationship is so disturbing that daily economics might just have to re-invent itself in the face of unpredictability. Imagine the aviation industry exhausting oil demands, in the face of historic low prices. Russia and Saudi Arabia understand the tradeoffs, yet national interests have blindfolded competing energy giants. In the long run, Russia and Saudi Arabia would have stored enough barrels to dictate oligopoly. Alluringly, the case does not rest there. Both the nations will also be hoping for which now looks like a miraculous recovery from the pandemic; future profits will uncharacteristically depend on a healthy market. The risk has been taken despite of all uncertainties. For a change, both Putin and Bin Salman will also be praying, nevertheless.

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