Saudi-Russia Oil Price Crash | Explained by Dhruv Rathee - YouTube

Hello friends

Oil prices have crashed drastically worldwide

A few months prior, the price of crude oil was 60 dollars per barrel

Today, it has fallen and has touched almost 20 dollars per barrel

A huge reason behind this is the ongoing price wars between three countries-

USA, Russia and Saudi Arabia

Such a huge crash not only has a great impact on the global economy

but it also has a vast effect on climate change and geo politics

Why exactly did this happen? What is this price wars ongoing amongst these countries?

How will this oil price crash affect India?

How will it affect the rest of the countries?

Come let us see in today's video

First of all, a small, basic economic concept that most of you would already know

that the price of anything in a free market depends on demand and supply

If the demand of something is more while the supply is less, then its price will rise

The same is with oil. If the demand of oil is less and the supply is more, then its price will fall

The top three oil producing companies of the world is USA, Russia and Saudi Arabia

All the three countries, in fact, all the oil producing countries would want for themselves

that they sell the most possible amount of oil at the highest possible price

so that they incur the most amount of profit possible

Generally, what would happen in a market is that the countries that buy oil

would look for the cheapest option of buying oil and buy from there

And a competition between the oil producing countries would be maintained

they would keep the price at the lowest amount possible so that oil is bought from them and they make profits

and this would drag down the profit of all the countries

An alternative is that they altogether decide to control supply and decide the price concertedly

which would enable all of them to earn a respectable amount of profit

All would be benefited

Therefore, an alliance exists between some of the oil producing countries

which is named OPEC

Organization for Petroleum Exporting Countries

13 countries are a part of OPEC , including Iran, Iraq, Kuwait, Libya, Nigeria, UAE, Venezuela,

and Saudi Arabia is also a part of OPEC

But USA and Russia are not a part of OPEC

OPEC is basically an agreement between these countries

where they sit together and decide what the price of oil should be

and how to control supply, which would prevent the fluctuations of price and ensure profits for everyone

In December 2016, OPEC signed an agreement with some non OPEC countries

that they would, together, increase the oil production upto 1 million barrels per day to keep the market stable

The real reason behind this was something else. I will explain that later in the video

So, basically, an agreement was reached upon between 13 OPEC countries and 10 non OPEC countries

and these 10 countries included Mexico, Kazakhstan and even Russia

So basically, there was an alliance between Saudi Arabia and Russia

This agreement was named OPEC+

Together, these were 24 countries

and altogether, they were controlling 55% of the world's oil supply

So, together, OPEC+ exerted a huge influence on the world economy

USA was still not a part of OPEC+. USA was a competitor of the OPEC+ countries

What is happening today is that due to this widespread virus, schools and colleges have been shut down.

Factories have been shut down

People are not moving out of their houses because the cities have been locked down-

which is a good thing and has been done for their safety

If you have been awaiting a video on this topic, then I will very soon make an updated video on it next

But let us focus on oil in today's video

So because of these things, air travel and shipping have declined due to which usage of oil has also reduced

The demand of oil has fallen due to which the price of oil is declining

This is one reason

But if the demand of oil is falling, we reduce the supply as well

then the price can be kept stable

Therefore, on 5th March, 2020, OPEC convened a meeting in Vienna

and together they decided that they would reduce the oil production by 1.5 million barrels per day

so that prices remain stable and all oil producing countries are able to earn profit

OPEC communicated this to the non OPEC countries as well, including Russia

This was told to the OPEC+ members as well

and requested them to curtail their production so that everyone can earn profits

But Russia refused to do this

In fact, Russia further raised its production

What this led to- the demand was already low, the supply rose even further

and oil prices crashed drastically as a result

and the alliance of Russia and OPEC came to an end

An obvious question that arises here is why did Russia do so?

because if oil prices fall then all the oil producing countries would bear the brunt

be it USA ,Saudi Arabia or even Russia

Russia would harm itself by doing this

So what is the logic behind doing this?

The reason behind this is that Russia wanted to attacked USA's Oil industry

Not an actual attack

It wanted to attack the US industry in the form of prices and Russia wants to destroy it

Although the enmity between Russia and USA has been on going since 1950s,

but in the aspect of oil it began around 2014

As a matter of fact, 20- 30 years prior to today, USA had been an oil importing country

It did not produce so much oil on its own but imported it from the other countries

Around 2010 -14 there was a revolution in its oil industries

due to which USA became an oil exporting country

The name of this revolution is Shale energy revolution

They basically discovered a new technique of oil drilling

It was a combination of hydraulic fracturing and horizontal drilling which is called Shale oil

due to which it extracts more oil from the existing oil fields in a more profitable way

The shale oil turned out to be so revolutionary

that it made USA the world's number 1 oil producer

It left Russia and Saudi Arabia lagging behind

USA snatched away the market share from Russia and Saudi Arabia

Due to the production of Shale oil, the supply of oil increased and the oil prices fell

This meant that the profit of the OPEC countries and Russia began to dwindle

Initially, when the shale energy revolution commenced,

then the OPEC countries thought that they would have to destroy the USA's oil industry

and keep their market share maintained

if they wanted to keep accruing profits in the future

In order to do this, the OPEC countries decided to increase their production due to which

the oil prices worldwide would fall and due to this fall,

it would no longer be profitable for the USA to produce shale energy

And so they would stop production and so later they would become the sole oil producers later

Interestingly, the oil drilling in USA is done by private companies

if the private companies of USA would go bankrupt, then the USA government would not intervene to save them

But in countries like Saudi Arabia and Russia, the oil companies were nationalized companies

So the government directly controlled them

So the government could keep funding the companies to keep them running

SO every one was facing losses but the OPEC countries were hoping that

the USA private companies would face losses and shut down

The competition would get ruled out. And they would compensate their losses from the governments

and then they could maintain competition

But the plan wasn't so successful

Not all of the private oil producing companies of the USA shut down- only some of them did

But overall, they were able to keep themselves sustained when the oil prices were falling

But even today, Russia feels that it can root out the USA private companies from the competition

and can capture back its market share in oil production

And so Russia increased its supply and kept the prices low

if the prices remain low for a long time, the private companies of USA would not be able to make profits

they would become bankrupt and would have to shut down ultimately

and Russia would be able to get back its market share

Basically Russia is frustrated with the USA because of several other reasons

because there are the Crimea and Ukraine issues

USA has imposed sanctions on Russia which is already having a lot of effects on their economy

So they thought that they would bear the losses for the time being

During this time, they would indeed face losses but the USA companies would shut down

And later when the USA companies would shut down, their market share would increase and

then they would increase the oil prices and earn profit

Russia feels like it might be able to do what OPEC failed to

Alexander Dynkin- President of the Institute of World Economy and International Relations in Moscow

It is basically Russia's think tank

He said that Russia has decided to sacrifice OPEC+ top US Shale producers

and punish the US for messing the Nord stream 2 project

Nord stream 2 was another project in which USA imposed sanctions due to which Russia had to face losses

Ofcourse, to upset Saudi Arabia could be a risky thing

but this is Russia's strategy at the moment

flexible geometry of interests

Russia knows that upsetting Saudi Arabia and OPEC is actually fighting a war on two fronts in a way

On one hand, the US is being angered and so is the OPEC on the other hand

But at this time, Russia has taken this decision because

It wants to target the US more and hence it decided to ignore the OPEC's decision

So what is the impact of this decision?

What Russia wants will happen to some extent

If low oil prices stay maintained over a sustained period of time,

there are a lot of small oil drilling companies in the US

Not all the companies in the US are huge companies, there are some small businesses indulged in oil drilling

They are going to face huge losses

They are going incurring huge losses because the demands have been low

So some companies might actually become bankrupt

But some big companies like Exxon and Chevron

They have enough money in their balance sheets that they wouldn't incur losses

But small companies might definitely get harmed

The US government is planning on giving government assistance to these oil drilling companies

in order to prevent them from becoming bankrupt

Russia has enough money to bear these losses in the short term

but in the long term, the Russian economy would be adversely impacted because

the Russian economy is dependent on oil exporting in a major way

In response, Saudi Arabia has also increased its production because why would it be left behind?

They too, want to maintain their market share

They too, can sustain losses for some time easily

And they are gauging that if the US companies shut down, they'd be benefited

and if Russia is unable to sustain, then too, it would be benefited

because every one would come to them to buy oil

The maximum brunt of this entire situation would have to be faced by small oil producing countries

For example, Iran, Iraq, Brazil, Argentina

Ivory coast, Malaysia, Indonesia, Azerbaijan, Kazakhstan

Because if the oil prices remain so low, they would not be able to sell oil at a profit

They would not be able to earn money.

And since they are small countries, their entire economy is dependent on oil

Nor do they have enough money to sustain themselves in the long term on such a small profit margin

The maximum benefit in this situation would be availed by the oil importing countries

For example India, China, Japan

Estimating how big of a benefit we would avail,

For example in the financial year 2019, India had spent 112 billion dollars to import oil

If prices remain this way, it is being predicted that in the financial year 2020 India will be spending

only around 64 billion dollars

It has been halved

So India will avail a benefit of approximately 60 billion dollars

This is quite a good news for the Indian economy

It remains to be seen whether the Indian government will pass on this benefit to the Indian consumers

It does not seem so because you must have seen that the government has hiked the taxes so that

all the profit accrues to the government

and the government would make itself economically better

Unfortunately from the perspective of the environment ,the entire situation will have a very negative impact

because this is the time when the entire world is making a transition to the electric cars

and it is not good for the electric car industries if oil and fuel are so cheaply available

and it is not good for the electric car industries if oil and fuel are so cheaply available

Plus, the recyclable plastics would become costlier

in comparison to manufacturing new plastic if the oil become so cheap

The companies would not get economic incentive to recycle

But at the same time we can hope that the situation might bring some changes in the oil producing countries

These countries might think that they should not remain dependent upon oil

and that they should switch to renewable energy

A huge example of this is USA

which could face thousands of job losses due to the crash in oil prices

and the USA might decide to turn to renewable energy sector to create jobs instead of the oil sector

I hope you would have found video informative. Share the video

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so that I may continue to make such content for you in the future

We will meet again in the next video

Thank you