Saudi Arabia Pressures Russia

One remarkable aspect in the recent fall in global oil prices is that Saudi Arabia has not cut production to prop them up. Much of the speculation about why the Saudis have sat by passively and allowed the oil price decline has been that they are trying to undermine higher-cost producers in the US and Canada. A decline in oil prices will make some of that production uneconomical.

While American producers will see their profits fall as oil prices decline, American consumers benefit from lower gas prices. Meanwhile, the oil price decline will hit Russia much harder than the US.

After the Russian intervention in Ukraine, both the US and EU announced economic sanctions against Russia. Those sanctions have had a minimal effect on the Russian economy, whereas the decline in oil prices poses a much larger threat. The Russian economy has been slow to advance in the decades since the Cold War, and has become increasingly dependent on natural resource exports for financial support. The decline in oil prices will hurt.

Among various economic threats thrown back and forth as a result of Russia’s intervention in Ukraine, Russia has threatened to cut off energy exports to Ukraine and the EU, and the economic impact of lower oil prices makes Russia more dependent on that revenue, and so less likely to actually follow through and cut off its exports.

I’d be hard-pressed to claim that pressuring Russia is the reason the Saudis have stood by and allowed global oil prices to fall. They may well have in mind undercutting high-cost American producers, as news analysts have suggested, and lower oil prices also puts pressure on Iran, which may help stabilize the Middle East.

Whatever their motives (and they may be many), it is easy to see that the decline in global oil prices, facilitated by the passive Saudi response, hurts Russia far more than the economic sanctions imposed by the US and EU.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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