What just happened?
An ‘Oil Price War.’ Russia and Saudi Arabia are vying to reach a new age of global dominance by wining the oil race. However, such competition has led to socio-economic breaches, which far outweigh the benefit of winning this race.
What does this mean?
Predatory pricing leads to price discrimination. When a state has an abundance of resource which is highly sought out for to ensure the process of daily necessity, it can use this to leverage a position which could significantly affect its counterpart state’s economy. Saudi Arabia’s decision to increase its crude oil supplies and collapse the price to cripple Russia is a prime example of Predatory Pricing.[1] According to the Financial Times, Saudi Arabia plans to pump more than 10 million barrels a day whilst announcing unprecedented discounts of almost 20% in the crucial market to compete with the Russian Oligarchs. However, the fall in oil prices acts as a double-edged sword for the Kingdom. Whilst, it allows the Kingdom to gain more market share in this sector, Prince Mohamed’s plan to modernise the economy also relies on the higher energy revenue generated from selling crude oil.[2] Furthermore, overproducing to push oil prices down could lead to the Kingdom’s bankruptcy within three or four years.[3]
How will this affect the legal industry?
Law firms with a global reach and vast expertise within the energy sector will have to find ways of countering large scales of anti-competitive conduct that will come from the Russian and Arabian businesses significantly cutting prices on petrol. It follows the price war will primarily affect the US market.[4] This is because, in contrast to Saudi Arabia and Russia, where large, state-owned, or related businesses dominate the market, the US market is made up of smaller firms that face debt and shrinking margins. Subsequently, without government backing, US firms depend on fair markets for survival.[5] As such, if the US firms remain hedged to the falling prices this year, their market share will be engulfed by bigger competitors such as ExxonMobil, who have the balance sheets to cope with the cheap oil. [6] It follows, a surge of potential mergers may line up in the foreseeable future, as smaller firms will undertake radical acquisitions to stay afloat in this market. This will pave the way for transactional lawyers specialising in mergers within the energy sector to bring forth the arrival of Oligopolies, taking a considerable number of shares worth billions of dollars in the relevant market. Therefore, resulting in further anti-competitive conduct taking place in the future.
Written by Amarjit Tark
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References:
[1] Malcolm Bartholomaeus, ‘Virus, oil war causing market chaos’ (The Farm Weekly, 16th March 2020)
[2] Anjli Raval, David Sheppard and Derek Brower, ‘Saudi Arabia launches oil price war after Russia deal collapse’ (Financial Times, 8th March 2020)
[3] Simon Watkins, ‘Saudi Arabia’s Oil War Could Bankrupt The Kingdom’ (OilPrice.com, 18/03/2020)
[4] See content on how this could affect smaller and unstable states in Scorched Earth, ‘No one is likely to win the oil-price war – Saudi Arabia, Russia, and America will all suffer’ (The Economist, 12th March 2020) and Anjli Raval, David Sheppard, and Derek Brower, ‘Saudi Arabia launches oil price war after Russia deal collapse’ (Financial Times, 8th March 2020)
[5] Enea Gjoza, Defense Priorities, ‘ Saudi Arabia is starting a reckless oil war with Russia – but the US is also a target’ (Business Insider, 14th March 2020)
[6] Scorched Earth, ‘No one is likely to win the oil-price war – Saudi Arabia, Russia, and America will all suffer’ (The Economist, 12th March 2020)
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.