The leaders of Russia, Saudi Arabia and the U.S. each badly miscalculated the pain caused by the collapse in oil prices. Now they are trying to rescue their economies and stave off any political damage at crucial moments for each.
The big decline in oil prices—sparked by a Saudi-Russia feud and a sharp drop in demand thanks to the new coronavirus pandemic—has hit all three of the men’s power bases at a moment when the global response to the pandemic threatens to pull their economies into recession.
Saudi Arabia's Minister of Energy Prince Abdulaziz bin Salman and Russia's Energy Minister Alexander Novak are seen at the OPEC and Non-OPEC meeting in Vienna in December.
Photo: leonhard foeger/ReutersPresident Donald Trump, Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin lead the world’s top three oil producers, respectively. Mr. Trump is counting on support from the country’s now-vast oil patch in his re-election bid. Mr. Putin is trying to extend his rule amid a weak economy, and the crown prince needs to consolidate power and keep funding his ambitious reform efforts.
Amid a Saudi-Russia standoff over production cuts, Mr. Trump has threatened to impose tariffs on oil imports. Mr. Putin refused to come to the phone when the Saudi crown prince tried to patch things up and salvage a long-running agreement between the two that had supported oil prices. Prince Mohammed then blew up the oil market by saying he would flood the world with crude just at the time when coronavirus lockdowns meant few needed it.
On Thursday, Saudi Arabia and Russia ended their stalemate and convinced a handful of other major oil producers to join them in the biggest monthly oil-production cut ever. The group is expected to hammer out the details of the deal in the coming days.
After initially threatening to pull its support for the deal, Mexico, a sizable oil producer itself, said it would reduce its production by 100,000 barrels a day as part of the agreement. Questions over the details of the deal left investors skeptical the cutbacks would be enough. Oil prices ended Thursday lower before a market holiday Friday. Benchmark U.S. crude tumbled 9.3% to $22.76 a barrel.
President Donald Trump held a roundtable meeting with energy sector CEOs in the the White House on April 3.
Photo: Pool/Getty ImagesMr. Trump spoke by phone on Thursday evening with Mr. Putin and King Salman, Prince Mohammed’s father, to discuss the emerging deal. During a news conference at the White House, Mr. Trump said the Russian and Saudi leaders “were getting along very well” during the call.
The Saudi-Russia pact, if it holds, is a victory for Mr. Trump, who came away without agreeing to call on U.S. companies to make cuts. Russia agreed to cut production by two million barrels of oil a day and Saudi Arabia by 3.3 million barrels. The Organization of the Petroleum Exporting Countries warned oil prices could fall to single digits without big declines in production.
The two countries are hoping that other producers ultimately agree to cuts that bring the total to 20 million barrels. Mr. Trump has said U.S. production will fall naturally because of low prices.
Facing re-election, Mr. Trump had initially said low oil prices would benefit consumers. Supporters in the energy industry warned sustained low oil prices could also wipe out thousands of jobs in states like Texas that have been important sources of fundraising for Mr. Trump’s campaign.
“What we’re talking about is helping some 10 million Americans who work in the oil and gas sector. These jobs are located in key battleground states and in many rural areas that are Trump strongholds,” said Dan Eberhart, chief executive of Canary, LLC, a Colorado drilling-services company. Mr. Eberhart, a Republican donor, has been in touch with the White House in recent weeks.
A White House spokesman didn’t immediately respond for comment.
Mr. Putin’s advisers initially said Russia would weather an oil price war with Saudi Arabia and that the biggest victim would be the U.S. Mr. Putin put off a phone call with King Salman early in the standoff, The Wall Street Journal previously reported.
But oil accounts for about one-third of the government’s budget. The economic turmoil could dent his popularity as he attempts to change the constitution and stay in office beyond his current term.
The depth of the ensuing price drop “cleared some minds in the Kremlin,” said Vladimir Frolov, a former senior Russian diplomat and political analyst. “This created a serious risk to Russia’s economy.”
“A month ago, no one could have predicted such a crisis and falling demand,” Kremlin spokesman Dmitry Peskov told reporters Friday. “Our position for stabilization of the market is consistent.”
Although Prince Mohammed instigated the price war, his government—and his personal ambitions to transform the country—are the most acutely impacted. Oil sales account for most of the kingdom’s revenue, and the big price fall is hampering the prince’s plans to invest billions of dollars in infrastructure projects and diversify the kingdom’s economy.
In recent days, the prince has been huddled with top advisers in the kingdom’s remote northwestern desert trying to figure out a way forward for the Saudi economy, say people familiar with the matter. He and his deputies have discussed cutting the budget across government ministries by as much as 30%, say people familiar with the matter.
This week, the country declared a unilateral, two-week cease-fire in Yemen as it tries to extricate itself from a costly war with Iran-backed fighters.
The oil feud has its roots in efforts by Saudi Arabia and Russia to boost prices. Amid a surge of shale oil production from the U.S., Saudi Arabia tried to force those producers out of business in 2014 by flooding the market. Since Saudi oil is cheaper to pump than American shale oil, Saudi officials reasoned they could bring the oil price below the frackers’ break-even point and end the glut.
But the American companies proved more resilient, and better able to produce at low prices than the Saudis expected. So the kingdom, along with its allies in OPEC, joined forces with Russia and a group of other big producers. The larger group, dubbed “OPEC+,” reached agreements over the past few years to limit their output and prop up prices.
When that alliance fell apart last month, Russian officials and oil industry executives weren’t planning on an oil rout of such magnitude. Mr. Putin had been focused on Russia’s biggest constitutional overhaul since the end of the Soviet Union: changes that would eventually allow Mr. Putin to extend his rule to 2036.
On March 1, Mr. Putin convened the heads of Russia’s oil companies in a conference room at Moscow’s Vnukovo airport. Those executives are longtime allies of Mr. Putin, and their support has helped him hold power.
Oil storage tanks stand illuminated at a refinery operated by Rosneft in Tuapse, Russia.
Photo: Andrey Rudakov/Bloomberg NewsCould Russia withstand a sharp decline in crude prices? Mr. Putin asked. The answer was a resounding yes, say people familiar with the meeting. Low oil prices “are great because they will damage U.S. shale,” Igor Sechin, the head of the state-controlled giant Rosneft, told the assembled oil executives and government officials. Rosneft didn’t respond to a request for comment.
In a few weeks, the view had changed. Russian oil executives began calling for Russia to seek a new deal with the Saudis. Ongoing tensions would amount to “a war of attrition which the U.S. will win,” said Leonid Fedun, vice president of Lukoil. Mr. Putin’s approval rating hit 63% in March, the lowest since 2013, according to the independent pollster Levada Center.
Mr. Putin spoke with Mr. Trump on March 30, and afterward said Russia was ready for a new agreement with OPEC and the U.S. After speaking with Prince Mohammed, Mr. Trump tweeted on April 2 that he was hopeful Russia and Saudi Arabia “will be cutting back approximately 10 Million Barrels, and maybe substantially more…”
In Saudi Arabia, the financial and political situation is growing more serious. The new coronavirus is spreading in the kingdom. Nearly 200 members of the royal family including Riyadh Gov. Prince Faisal bin Bandar al Saud, his wife, and the son of another provincial governor, have been infected, say people familiar with the matter.
The economic fallout is spreading, too. Prince Mohammed has been working to bolster Saudi Arabia’s stock market by using government money to buy stocks, say people familiar with the plan, a strategy he has used before.
The crown prince has also continued a crackdown on officials and princes he accuses of corruption. Two senior princes who are potential rivals to the throne have been held for weeks, say people familiar with the matter. He also detained at least 10 social media influencers and intellectuals since the start of April, according to people familiar with the matter.
In the U.S., Mr. Trump—who has much less control over his country’s oil industry than Prince Mohammed or Mr. Putin—doesn’t have an obvious way to cut production in hopes of staving off bankruptcies and job losses. His administration, though, discussed the idea of idling offshore oil production to stem the spread of the virus, the Journal reported earlier this month. That would take about two million of the U.S.’s 13 million barrels-per-day of production offline.
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Despite the mammoth sway Russia and Saudi Arabia have over oil markets, the U.S. nonetheless has some policy leverage, including tariffs, Mr. Trump and his advisers say. “We essentially would be saying we don’t want foreign oil, we don’t want any foreign oil, we’re just going to use our oil and that would help to save an industry,” Mr. Trump said at a recent White House news conference.
There could be a political upside for Mr. Trump even if oil stays low. Gasoline prices are at their lowest point in years. Even as he has acknowledged that low oil prices are harming the U.S. economy, Mr. Trump has touted the corresponding drop in gas prices, casting it as a virtual tax cut for consumers.
“Do you think it’s just luck that gas prices are so low, and falling? Low gas prices are like another Tax Cut!” he wrote on Twitter early this year.
—Benoit Faucon contributed to this article.
Write to Georgi Kantchev at georgi.kantchev@wsj.com, Summer Said at summer.said@wsj.com, Andrew Restuccia at Andrew.Restuccia@wsj.com and Justin Scheck at justin.scheck@wsj.com
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