Mikhail Krutikhin* – about oil production

in The Moscow Times Economist Mikhail Krutikhin (included by the Ministry of Justice in the register of foreign agents) writes :

“What similarities do the current market situation have with the then oil crisis, which jumped from a shock shortage to an equally shock excess supply of oil?

As in the 1980s, the wider OPEC (OPEC+) is holding back production, touting the process as an effort to stabilize the market. The cartel claims that they are removing excess oil from the market, accumulated in reserve storage facilities, and supposedly preventing prices from falling. Saudi Arabia is again among the pioneers of the movement: it has reduced production much more than it was supposed to under the quota agreed upon within OPEC+. The Americans, as then, act independently of OPEC and, on the contrary, increase production, undermining the cartel’s efforts. And some members of the association are also not inclined to reduce the amount of oil produced...

Prices practically do not react to the actions of OPEC+, or even to the aggravation of the military-political situation in the Middle East. Moreover, the Saudi initiative to stabilize the market by reducing production began to have an extremely negative impact on the economic indicators of their kingdom. <…>. The reason is a reduction in production, which is not compensated by higher prices.

In other words, the preconditions are emerging for repeating the step that the Saudis took in September 1985: to spit on their partners and pump as much oil into the market as the wells will produce. This scenario, by the way, has been studied by analysts more than once. <…>. Some analysts even believed that in this scenario, Saudi Arabia could coordinate actions with the United States, and the main losing party would be Putin’s Russia with its high production costs.

The probability of this scenario is non-zero. The Saudis are under pressure from financial problems that threaten to derail the kingdom's plans to build a new, cutting-edge economy. This incentive to radically increase Saudi oil production may not be enough yet, but if a proponent of rapprochement with Riyadh and coordination of important political and economic positions comes to power in the White House, Saudi Arabia may decide to repeat the old trick and bring down prices.

In this case, Russia’s oil revenues will dry out, which could cause an economic catastrophe and internal political upheaval.”

* included by the Ministry of Justice in the register of foreign agents