Poker games get no bigger than this. Saudi Arabia’s Prince Mohammed bin Salman has gambled that a threatened cut of almost US$1 trillion to global oil revenue will force Russia’s President Vladimir Putin back into the embrace of OPEC.

The Russians figure they can outlast the Saudis in a price war and are prepared to sit tight, calculating that the greatest damage will be inflicted on Saudi Arabia’s long-time ally, the United States.

‘Good for the consumer, gasoline prices coming down!’ was US President Donald Trump’s tweeted response ^[1] to the Saudi decision to remove constraints to its oil production. But it is the threat to the US shale oil industry, which is carrying debts of US$86 billion, that has Wall Street investors worried.

As the world’s biggest oil producer with relatively high operating costs, the US is the supplier most exposed to a price war sparked by the rivalry of the second and third largest oil producers.

There will be no winners if the combined impact of an oil price collapse and the coronavirus is a global recession, but to the extent that anyone gains from plummeting oil prices, it is the big importing economies of China and Europe.

There had been talk of a bromance between Putin and bin Salman. They greeted each other with high fives at the Buenos Aires G20 summit in 2018, where the prince was otherwise cold-shouldered over the assassination of journalist Jamal Khashoggi inside Saudi Arabia’s Istanbul consulate a few weeks earlier.

The relationship between the two was struck in 2015 when, as deputy crown prince and Saudi defence minister, the then 29-year-old bin Salman led a delegation to Moscow, bringing promises of multibillion-dollar Saudi investments in the Russian oil industry.

In late 2016, Russia entered a formal agreement with the OPEC nations to contribute to a cut in oil production to support oil prices which had sunk below US$30 a barrel.

Bin Salman visited Moscow again in 2018, ostensibly to support the Saudi soccer team against Russia in the opening round of the World Cup (the Saudis lost 5–0) but more substantively to discuss the need for continued restraint in their oil production in the face of surging US production.

Putin became the first Russian leader to visit Saudi Arabia in more than a decade last October, but there were murmurings of discontent, sparked by Russia’s dissatisfaction that promised Saudi investments had not materialised.

Putin has never played a simple strategy in the region; he has also fostered Russian relations with arch-Saudi rival Iran and become the decisive supporter of Syria’s Bashar al-Assad in his prosecution of the civil war there.

Sitting alongside Iran’s President Hassan Rouhani and Turkey’s President Recep Tayyip Erdogan at a news conference about Syria last September, held just a few days after the attack by Iranian-backed rebels on Saudi oilfields, Putin suggested ^[2] the Saudis could better protect their population if they followed the Turkish and Iranian precedents of investing in Russian missile systems. The remarks were pointed, as the Saudis had cemented a deal to buy US Patriot missiles.

The Russians went along with the OPEC grouping when it decided last December to increase the cut to their combined production by 900,000 barrels a day, of which Russia contributed about a third, lifting the total production cuts to 2.1 million barrels a day, or roughly 2% of global demand.

The Saudis were concerned that the world economy was slowing while the volume of oil coming onto the market from the US was rising. They also wanted to support the oil price while they were floating 5% of their state-owned oil company Aramco.

With the coronavirus bringing sharp reductions in global air travel and shipping volumes, which between them account for 15% of global oil consumption, Saudi Arabia was seeking further production cuts of as much as another 1.5 million barrels a day.

However, Moscow declared it had had enough. While Russia had kept its oil wells idle, the US shale industry had added more than 1 million barrels a day to world supplies. Further cuts would simply hand further gains to the Americans. Moscow has also been angered by the US’s imposition of sanctions on contractors working on Russia’s Nord Stream 2 gas pipeline to Germany and also on its oil company Rosneft over its assistance to Venezuela.

The Saudi retaliation of a threated boost, rather than cut, to its own production has sent prices into a tailspin. At US$35 a barrel, the oil price is down 45% from last year’s average of US$64 a barrel. If prices remained at the current level, it would translate to a loss of around $US900 billion in revenue for producers.

The Financial Times cited ^[3] a social media post from the director of the main Russian state news agency, Dmitry Kiselev, declaring that ‘now we have the chance not just to sell as much as we need to, but to throw American shale overboard. Our budget is more stable than Saudi Arabia’s and is ready for low oil prices, unlike the kingdom’s.’

The Saudis have tried a tactical flooding of the market before. In 2014, as US shale oil started changing the global market, Saudi Arabia abandoned production cuts in the hope of driving shale producers out of business. The strategy did not succeed and the shift two years later to restraint in an alliance with Russia was the response.

The director of the US Atlantic Council’s energy centre, Randolph Bell, argues ^[4] that the Saudi–Russia relationship was one of the few negatives to emerge from the growth of US shale oil production, and that it is now ‘in tatters’. On the other hand, energy independence has given the US the strength to impose economic sanctions on Russian oil producers.

‘US companies will feel pain, but shale has proven to be remarkably resilient. It seems very likely that this decision will backfire for Russia and further advance US goals’, he says.

Others are not so certain. The world economy is weaker now than in 2014, when the Saudis last flooded the market. The average break-even price for US oil producers is in the US$48 to US$54 range, and US producers are now much more heavily indebted than they were six years ago.

The cost for insuring against default on US oil company debt has risen to its highest level since the collapse of Lehmann Brothers in 2008, while the bonds of some oil companies are trading for as little as 30 cents in the dollar. It is not just the minor operators that are suffering; Occidental Petroleum’s market value collapsed from US$40 billion last year to US$15 billion now.

An oil-price-induced debt crisis at the same time as consumption is being threatened by the coronavirus is a dangerous combination for the US economy and for its election-bound president.