Analysis: Saudi Arabia started the oil price war - now you have to pay

In early March, Saudi Arabia launched a global oil price war, in parallel with the fall in oil demand due to the corona pandemic. Now the kingdom's treasury is shrinking dramatically and painful savings are being made.

Yesterday, the announcement came that the cost of living allowance - the special monthly allowance of the equivalent of SEK 2,600 paid to all government employees - is paused as of June. VAT in the country tripled from five to 15 per cent, which affects households with lower incomes. These are reforms that would be painful for any government, but especially noticeable in Saudi Arabia, where many residents have grown accustomed to living in welfare thanks to the oil.

Saudi Arabia and Russia together account for more than half of the world's oil production. The countries in the oil price cartel Opec usually enter into agreements to limit the production of oil in order to keep prices up when demand falls. But when the price of oil went down in early 2020 due to the corona pandemic, Russia did not want to cut back on the recovery.

The war began on March 6 this year, when Russian Energy Minister Alexander Novak told reporters outside Opec's headquarters in Vienna that Russia was ready to increase oil production in April.

He had just rejected Saudi Arabia's proposal to cut oil recovery by a few hundred thousand barrels a day to parry what many just saw as a slight decline in oil demand around the world.

Saudi Arabia's response came immediately. The kingdom was avenged by pumping up more oil than ever before - and lowering prices. Saudi oil is cheaper to absorb than Russia's and US's oil reserves, and the plan was to gain market share by competing out the opponents. Nevertheless, experts are wondering about the country's crown prince Mohammed Bin Salman just then realized the consequences.

US congressmen accused Saudi Arabia of "economic warfare" and threatened to withdraw military troops from the kingdom if the price war continued. After a chaotic month when the oil price plunged to its lowest level in decades, a settlement was finally reached between the major oil countries.

Oil recovery was cut with a record high of 9.7 million barrels per day. But demand has dropped even more since then and the low oil prices will last a long time to come.

The pandemic had led to falling oil prices in any case. But analysts say the price war accelerated development.

For Saudi Arabia, this means that the Kingdom will lose half of its oil revenue this year. 90 percent of the country's export revenue comes from the oil, and many suggest that more austerity is coming. The investments in "Vision 2030" that would create sustainable jobs for the country's young population have also been pushed into the future.

While oil analysts question whether oil consumption will ever reach the same level as before the corona pandemic, the air has become easier to breathe in many cities as a result of reduced traffic as the economies shut down.