OPINION: Saudi Arabia has moved with lightning speed to mobilise its fearsome oil war machine in the emerging battle over market share against Russia and other key producers.

Riyadh dropped a bombshell on Tuesday by pledging to pump 12.3 million barrels per day in April in a deliberate attempt to flood an already overflowing oil market reeling from the devastating impact of the coronavirus outbreak.

Furthermore, it is luring major clients with deep discounts to encourage buying at a time of collapsing demand.

The output boost — more than 25% above the current estimated production — far exceeds the kingdom’s maximum sustainable capacity.

It involves tapping strategic oil reserves to ensure Riyadh wins an oil price war as quickly as possible. No other producer comes anywhere close to matching the Saudi spare capacity muscle.

The Saudi strategy was unveiled following the collapse of Opec-led talks in Vienna, Austria last Friday to enlist Russia’s support for fresh production curbs. Oil prices responded by recording the largest one-day rout in almost three decades on Monday.

The kingdom’s capacity clout is enviable by any standards. It boasts a formidable spare cushion of 2 million bpd, which is underpinned by arguably the lowest production costs in the world.

The new strategy is fraught with dangers, however, as a prolonged market share grab can seriously strain Saudi Arabia’s finances and derail ambitious plans by maverick de facto leader Crown Prince Mohammed bin Salman to diversify the economy.

The recent price rout risks draining cash reserves quickly and widening a budget deficit in a country where the unelected ruling Al Saud family relies on a generous social welfare system to ensure loyalty from citizens.

Thus, the increasingly autocratic Crown Prince appears to have calculated on winning a quick war in moving to pull out all the stops to take on rival producers — Russia, in particular.

While Moscow’s refusal to acquiesce to further production curbs in Vienna may have been prompted by President Vladimir Putin’s desire to hurt the higher-cost US shale industry, the Saudi offensive is primarily aimed at Moscow.

Riyadh believes that taking on US shale producers will not produce the desired quick victory as the industry is highly resilient.

While smaller debt-ridden US producers may go under quickly, the larger and more nimble players — such as the supermajors — will quickly fill the gaps and grab the most productive fields.

In any case, Saudi officials believe US shale has already peaked and is, therefore, unable to compete with conventional resource holders for long.

Riyadh is irate because Moscow abruptly turned its back on a painstakingly crafted three-year alliance that had ensured market stability.

A united stance would have, therefore, benefited the world’s two leading producers, while both stand to lose enormously from the emerging oil war.

“The current disagreement between Russia and Saudi Arabia may turn out to be a spectacular own goal. Neither stands to gain from falling oil prices," says Michael Bradshaw, professor of Global Energy at Warwick Business School.

“The oil industry may suffer further boom and bust cycles during the 2020s, but those will eventually give way to structural decline as climate policy threatens to destroy demand for fossil fuels.

"In that context, engaging in a short-term price war is folly, akin to arguing about who owns the deck chairs on the Titanic,” Bradshaw argues.

His advice is for both to focus on diversifying their oil-dependent economies.

(This is an Upstream opinion article.)