Saudi Oil Gambit Leads to Market Panic

Here is today’s Foreign Policy brief: Saudi oil price war puts markets in turmoil, coronavirus shuts down all of Italy, and Ashraf Ghani survives rocket attack at his presidential inauguration in Afghanistan.

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Global stock markets tumbled on Monday amid falling oil prices and uncertainty driven by the global coronavirus outbreak. In New York, the Dow Jones industrial average was down 2,000 points—the most points ever lost in one session. In London the FTSE 100 suffered its fifth-worst day in history as the index lost almost £125 billion (approximately $160 billion) in market value.

What sparked the selloff? The immediate catalyst appeared to be Saudi Arabia’s decision to offer deeply discounted oil prices following Russia’s refusal to go along with OPEC’s plans for cuts in production. In the face of potential falling oil revenues, Russia has remained defiant, “The Russian oil industry has a quality resource base and enough financial resilience to remain competitive at any forecast price level, and to keep its market share,” Russian Energy Minister Alexander Novak said at a government meeting on Monday.

Who will blink first between Russia and Saudi Arabia? Between the two, Russia seems best placed to weather the storm ahead. Russia only needs a $42 a barrel price to balance its budget, whereas Saudi Arabia needs prices to be over double that amount. As Jason Bordoff argued yesterday in Foreign Policy, “The problem for the kingdom is that Russia is more resilient to lower prices than it is, having added considerably to its foreign exchange reserves while Saudi Arabia’s fiscal cushion has dwindled since the 2014 oil price collapse,” he wrote. Even with ample reserves “a prolonged period of low prices will strain the Saudi budget, undermine investor confidence, and lead to speculation about the devaluation of the Saudi riyal.”

According to Sarah Ladislaw, director of the energy security and climate change program at the Center for Strategic and International Studies, the Saudis can’t sustain their bluff for long. “I don’t think this is a situation Saudi Arabia finds comfortable,” she said, citing the dual pressures of the domestic budget and the need to keep Saudi Aramco’s share price stable. “I don’t think they want to do it for very long, I don’t think they can do it for very long, and that’s why I think they’ve taken such aggressive action,” Ladislaw said.

Is it time for U.S. government intervention? U.S. President Donald Trump, who has a habit of celebrating stock market highs on twitter, has so far shrugged off concerns about the recent market drops, tweeting, “Good for the consumer, gasoline prices coming down!” However, Foreign Policy’s Keith Johnson writes that if low oil prices persist, a wave of bankruptcies in the U.S. shale sector will likely follow. The Washington Post reports that intervention is on the table to mitigate the economic effects of the coronavirus, with several policy options available to the president—including introducing paid sick leave measures and emergency funds for small businesses.

Coronavirus response escalates in Italy. Italy further extended its quarantine to include the entire country in another unprecedented move for the European nation worst hit by the coronavirus. Italians will only be allowed travel for work, medical reasons, or emergencies until April 3. “The right decision today is to stay at home,” Prime Minister Giuseppe Conte told reporters, “Our future and the future of Italy is in our hands. These hands have to be more responsible today than ever before.”

The drastic move could slow the spread of the virus, but it may be too late. As Mattia Ferraresi argues in FP, Italy’s ruling class and its scientists have been publicly squabbling for weeks in order to score political points and gain publicity, while imperiling the country’s health.

Is it a pandemic yet? Speaking at a news conference yesterday, World Health Organization director-general Tedros Adhanom Ghebreyesus stopped short of calling the outbreak—now at 110,000 confirmed cases worldwide—a pandemic, but said the threat of one is “very real.” Meanwhile, in Israel, Prime Minister Benjamin Netanyahu announced that all travellers entering the country from abroad would need to self-quarantine for 14 days upon arrival. The ruling is in place for the next two weeks and could affect up to 268,000 Israelis already outside the country.

Rockets disrupt Ghani inauguration. In Afghanistan, Ashraf Ghani was inaugurated as president. He wasn’t alone in claiming that title: His rival, Abdullah Abdullah, held his own swearing-in ceremony as the two continue to dispute the outcome of a September presidential election. Ghani’s speech was interrupted by rocket fire during the ceremony, but he played down its impact, “We have seen major attacks. Don’t be afraid by two small blasts,” he said.

Is the Afghan peace process still on? As Afghanistan endures more political turmoil, the March 10 date for talks between the Afghan government and Taliban has now been missed. However, hope of dialogue still remains: Sources told Reuters that President Ghani plans to issue a decree releasing at least 1,000 Taliban prisoners this week, a move that addresses a major sticking point.

Marines killed in Iraq. Two U.S. Marines were killed and four other U.S. troops were wounded in Iraq during an anti-Islamic State operation conducted alongside Iraqi security forces. Joint counterterrorism operations have resumed in the country after a pause following the killing of the Iranian commander Qassem Suleimani in January.