Oil price war: Is it game of chicken or battle of nerves?

March 6, 2020 is a milestone in the oil industry when two giants in the field locked horns for supremacy in oil price war. When Saudi Arabia requested reduction of oil production by 1.5 million barrels a day Russia vetoed it and declared that she will not conform to existing voluntary production cuts. Immediately KSA announced that it will increase output. Consequently, price plummeted by 25%. The business warfare on oil began.

Business strategists are wondering whether this leads to a game of chicken or battle of nerves. For the uninitiated, the game of chicken implies a contest between two players where neither one wants to back down nor let the other win even though not backing down is suicidal. On the other hand, battle of nerves is a situation where neither side in a conflict is willing to back down but expects the other to weaken.

Russia has amassed a war chest of US$ 570 Billion in cash and mainly in gold and can withstand low price oil regime @ US@ 25 per barrel for a period of 10 years. Cost of production of oil is around US$ 15 per barrel. Russia earns in US$ and spends in Ruble. Depreciation of Ruble will make its exports cheaper. Moreover it frees the economy to invest and enlarge non-oil sector. Russia adopts flexible fiscal policy that can be adjusted to support oil producers to cushion adverse effects. For Russia balancing her budget with huge development program requires oil price in the region of US$ 30 per barrel.

KSA has also has a surplus of US$ 450 Billion mainly in cash and US Treasury bonds. It cannot sustain low price regime for more than one year because it already runs a huge budget deficit. Never the less KSA has ability to borrow from market sources or liquidate US Treasury bonds. KSA has few more pluses: It can produce in certain wells oil as low as US$ 1 per barrel. None the less exhaustion rate dries down the spare capacity to a decade or so. She has invested heavily on Vision 2030 requiring massive investments into non-oil sector.  There is a double whammy in that balancing fiscal budget needs oil to be sold @ US$ 80 per barrel.

This oil war neither fits into game of chicken nor battle of nerves because considering the above strengths and weaknesses it is wise business strategy to fix a time frame for the duration of oil price war. Both Putin of Russia and Mohamed bin Salman (MbS) of KSA are pragmatists and are guided by common business sense and must begin consultation via back door channels for a win-win solution.  

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

Weaponizing oil in business warfare

Saudi Arabia is the market leader in production and sale of crude oil. KSA often resorts to oil price to muscle out the targeted competitor/s depending on the market situation. Here are three instances where KSA weaponize oil in price war to outwit others in business warfare:

In 1985 USA prevailed upon KSA to bring down the oil price to elbow out Russia and bring economic demolishment to her. Taking this order literally, KSA started to increase oil production in such manner that oil glut in the market brought down the price per barrel to the lowest figure of US$ 10 that devastated not only Russia but the entire oil market. Incidentally KSA can produce crude oil much cheaper going down as just one dollar per barrel.

In 2014 the prevailing price of crude was US$ 100 per barrel. At this time US Shale producers were having gala time as their sales skyrocketed. The only hiccup they had is the high production cost. To sustain their business they need at-least the level of US$ 60 per barrel. KSA went on increasing production resulting in steep fall of oil price. Before long the Shale industry collapsed as the price fell much below their safety zone.

In March 2020 KSA undertook a big gamble. Along with UAE they have commenced increasing production despite earlier agreement signed in Vienna to conform to three objectives:

1. Decrease oil production to allow distribution of market share between OPEC and non-OPEC countries.

2. Prevent fall of price

3. Stabilize the market price in a safe zone for the major players in crude oil market

KSA reneged its undertaking and along with UAE started to produce more crude oil. KSA alone commenced pumping 13 million barrels per day (bpd). Immediately the price slashed 25% to US$ 36 per barrel. This time KSA wants to take on both Russia & Shale sector of USA at one and the same time.

How this weaponizing oil pay out? Let’s wait and see.

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

How to apply staggered defence in business warfare?

Defensive business strategy is an essential for a market leader in a particular industry who could mount effective defence in the event of business warfare imposed upon it by a combating contestant. To wear down the opponent and to economise on resources it must opt for staggered defence in three layers.

Perimeter one: in military doctrine this layer is the outermost amongst the three, looking beyond borders or territorial waters. Functioning as deterrence along with defence it uses high powered radars to identify large bodies such as aircraft & missiles. Here the radars could peer deep into space as such the altitude of flying does not matter. Never the less it does not blip on smaller ones such as low flying crafts or unmanned aerial vehicles (UAV). As a result the latter could creep thru.

Perimeter two: As the middle layer defence this structure looks at the border or coastal area and lock on any items up to the size of a motor car. Most if not all the low flying aircrafts or UAVs would be locked on and brought down with high degree of precision. The negatives are altitude restriction and lack of clarity in distinguishing between flying birds and flying machines.

Perimeter three: This defence layer is located deep inside the country/territory and could identify any object to the size of tennis ball. As the radar could detect anything and everything over the sky all flying or gliding machines would be shot down with 100% precision and efficiency.

Applying staggered defence in business warfare is the job of the business strategist who while formulating business strategy gives primacy to this doctrine. A classic example was cited by William C Finnie when Coca Cola entered the wine industry in 1977 taking E J Gallo Winery on a frontal war. Even though Coca Cola was much superior in terms of financial and marketing strength, E J Gallo beat the cola giant by using well-crafted defensive business strategy staggered on three levels:

a) Superior defensive position in perimeter one

b) Sound business strategy that combines both defence and offence in one go in the second perimeter

c) Aggressiveness, a unique trait of Gallo Winery noted and toasted in the wine industry, anchored on the innermost perimeter.

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist