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Saudi Arabia wants to increase its oil production. This could have drastic effects on Russia’s economy. What’s next?
Riyadh – The revenue from oil and Gas is one of the most important drivers for Russia’s economy. Anyone who reduces this, as the G7 countries planned to do with the oil price cap, is indirectly attacking Russian President Vladimir Putin’s war chest. A new move from Saudi Arabia could do just that.
Saudi Arabia plans higher oil production – and could harm Russia’s economy
According to media reports, Saudi Arabia wants to increase oil production. Apparently the country, one of the world’s most important oil producing nations, is ready to abandon the target of $100 per barrel of crude oil. According to the Financial Times This suggests that Saudi Arabia would accept lower oil prices. The decision goes directly against a decision by OPEC+ members, who agreed at the beginning of September to cut rather than increase production in order to keep prices high.
Earlier in September, the oil price for Brent Crude crude oil fell below $70 – it had not been this low since December 2021. Oil production is expected to increase from December 1, 2024. Like the news portal Newsweek Citing unnamed experts, reported that this step by Saudi Arabia is intended to directly harm the Russian economy. Higher oil production and lower prices are said to be “stressing” Russia’s economy while the country is still at war in Ukraine.
The first effects are already visible: like the news agency Reuters reported that oil prices fell by more than three percent yesterday (September 26th).
Russia’s economy needs oil revenue – EU wants to “hit profits even harder”
For Russia, oil prices are one of the most important economic factors. According to that Observatory of Economic Complexity (OEC), exports of crude petroleum accounted for around 27.3 percent of the country’s total exports in 2022. Refined petroleum accounted for almost 14 percent. The most important buyers for Russian oil were in June 2024 ChinaIndia and some remaining EU countries.
In order to weaken Russia’s economy, lowering oil prices is a correspondingly powerful instrument. For precisely this reason, Ukraine’s Western allies have taken this into account in the economic sanctions they have implemented and put a price cap on Russian oil exports. To be traded in the West, Russian oil can cost a maximum of $60 per barrel. In December 2022, EU Commission President Ursula von der Leyen announced that she wanted to keep this limit flexible.
“The G7 and all EU member states have decided to hit Russia’s gains even harder and further limit its ability to wage war in Ukraine. This will continue to help us stabilize global energy prices. All countries around the world that are currently confronted with high oil prices will benefit from this,” von der Leyen explained at the time.
40 dollars per barrel possible – is Saudi Arabia causing a price war?
The question arises: How low can the price of oil fall now? According to analyst Tamas Varga, Saudi Arabia’s move is simply a reversal of a previously decided production cut. Saudi Arabia’s increase in production is expected to create an additional crude oil supply of around 180,000 barrels per day per month.
“No doubt it will loosen the global oil balance, but at the same time it will reduce OPEC’s spare production capacity,” Varga told Reuters. “It will most likely lead to an increase in inventories in 2025 and keep prices under moderate pressure.” But the analyst believes that what is more important is the possibility of a supply war that Saudi Arabia’s move could herald. If this happens, he expects it to be a “painful collapse”. The barrel price could fall to as much as $40 – which would even significantly undercut the G7 price cap.
Russia’s oil revenues fell in the summer. The Centre for Research on Energy and Clean Air assumed a decline in export revenue from crude oil by five percent, to 664 million euros per day. According to the institute, a lower oil price cap is needed to further weaken Russia’s economy. (Laernie with material from Reuters)
