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The Start of the Oil Price War – The Decay of OPEC

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Right now OPEC countries continue to increase oil supply, causing huge surpluses resulting in a significant drop. The price of Brent oil deescalated to $30.05 on the 20th of March, 2020. This is the first major crisis since the 2008 Global Financial Crisis. Given Russia and Saudi Arabia’s staunch stance, it looks like this conflict is not to be resolved sooner.

Speculations indicate the end of the OPEC alliance. Where will this lead the world economy?

The OPEC alliance consisted of 11 member states. Established in 2016, it created a joint cooperation for the supply of oil. Russian President, Vladimir Putin and Crown Prince of Saudi Arabia Mohammed bin Salman shook hands alongside other leaders and the deal was done. It was good news in terms of political and economic settlements, in hopes of abolishing disputes between the two sides and improved relations.

The downward spiral of the global outbreak

The emergence of recent events has run twofold. The world of oil is at a drastic halt. And as a result, Russia decided to quit this alliance. A reason for this split fueled certain speculation, claiming a US involvement. In recent years, the US began to improve its oil industry. The optimization of their oil companies and their focus on heavy industries led to a more consistent demand in comparison with their competitors. Most of their exports consist of shale oil which is considered to be high-quality crude oil. This brought the American oil trade above China in the first quarter of 2020. While these are temporary results, the conflicts for oil dominance continue to escalate amid drillers and storage space between all oil-rich nations.

This achievement was partly due to constant production cuts which were implemented by the OPEC+ alliance in recent years. The USA has made attempts at imposing sanctions on Russia over its foreign policy activities. Further production cuts could have hampered the already lingering Russian economy. Having little choice, Russia decided to act against Saudi Arabia’s will.

The Looming threat of COVID-19

The latter reason for the attempts at resurgence can be traced back to the coronavirus epidemy. The shutdown of workplaces and production facilities crippled the demand for oil and gas prices. As a result of it, OPEC countries were interested to decrease the supply in order to preserve the price of the oil. 

This impasse slashes out at both economies…

Having access to excessive foreign reserves can alleviate the situation. But Russia is at a disadvantage in terms of capital. With its 440 billion dollars in foreign reserves, it is compelled to tighten its belt even more than Saudi Arabia’s 490 billion dollars. It is important to note that Russia’s budget was based on the price of 42 $ per barrel, while this number is 82 $ per barrel for Saudi Arabia. So, Russia can survive this crisis better than its opponent. However, one should not disregard the close collaboration Saud Arabia enjoys with US feds in its time of crisis. 

The author of this article is Tofiq Bayramov. He is from Azerbaijan and currently studies MSc. in International Business and Economics at Szeged University. He is a member of IDSA (International Diplomatic Student Organization.)



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