Crude Oil War - A Story of 130$/Barrel


Saudi Arabia - Russia Crude Oil Price Deal

In the year 2016, Russia and other oil producers agreed to join OPEC nations in a rare, coordinated reduction in oil output meant to lift petroleum prices and revenues to shore up their sagging government budget.

The agreement reached OPEC headquarters in Vienna, was the latest attempt by producers led by Saudi Arabia to adjust the output in an effort to "Influence" crude markets. The oil-producing nations outside the organization of the Petroleum Exporting countries agreed to cuts of 558,000 barrels per day. 

After three years of agreement deal, Russia backed away from the deal and Saudi Arabia had wanted to lead OPEC and Russia in making deeper cuts to oil production to support crude prices in the face of the coronavirus outbreak, which has disrupted global economic activity but  Russia refused to follow Saudi Arabia and OPEC. Hence, Saudi Arabia is very disappointed by Russia and try to punish them financial condition by a crude price war.   

What is OPEC?       

It is the "Organization of the Petroleum Exporting Countries" group of 14 oil-producing nations founded on 14 September 1960 in Baghdad,   
Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates and Venezuela

Why did Russia not agree to cut production?
Russia officially said it wanted to see the full impact of the coronavirus on oil demand before taking action. Moscow has also been keen to test the US shale industry. It believes that cutting output would only hand a lifeline to a sector whose growth has turned the US into the world's largest oil producer, gaining customers at Russia's expense.

We can observe from the chart that crude oil was $130/barrel in year 2011 and it remains steady until the year 2014. however, it started to crash to around 60% in the year 2016. It is interesting to note that it suddenly slumped to 30% in 2020.

Benefits to India due to the crude oil price war

If prices remain at the $50 per barrel range for the rest of the year, India may save a whopping $22 billion in its import bill in 2021.

If it stays below $35 per barrel for the whole year then India's saving could be beyond 30 billion USD.

For example, At $45 per barrel, the import bill will stand at $74.71 billion, $66.41 billion at $40 per barrel and $63.09 billion at $38 per barrel. Compare that with 2019's import bill of $105 billion for 2020.

For the consumer, the most direct impact is likely to be in the expected decrease in petrol and diesel prices. Petrol has already fallen from Rs 74 per litre in Ahmedabad at the beginning of January to Rs 67.84 per litre and diesel from over Rs 71.14 per barrel to Rs 63.08 now.

We wish, World will come out from Pandemic soon.


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