You can sense something in the price board at any gas station in Europe or Asia right now that numbers alone can’t fully convey: a sense of economic vertigo, as if a decision made in a palace in Riyadh has trickled down to this specific forecourt, this particular morning. Crude is not an abstraction when it is hovering around $119 per barrel. Freight costs, grocery prices, and the silent, uncomfortable math that regular people do in their heads before each fill-up are all examples of how it manifests.
Since early 2025, Saudi Arabia has been drastically reducing its oil production, cutting it by up to 2.5 million barrels per day. The total Gulf cut has increased to about 6.7 million barrels per day when Iraq, the UAE, and Kuwait are taken into account. Market balance is the official explanation. Fiscal pressure is the true cause, and this distinction is crucial.
“Riyadh needs crude above $80 per barrel to sustain its domestic spending. The rest of the world’s needs don’t enter the calculation in any obvious way.”
One of the most costly building projects in human history is currently underway in the kingdom. A constant flow of petrodollars is necessary for the NEOM megacity, a $500 billion wager on a post-oil future that is ironically funded almost entirely by oil. The budget breakeven price in Saudi Arabia is between $80 and $90 per barrel. Crown Prince Mohammed bin Salman becomes uncomfortable with the math if it falls below that. Thus, Riyadh lets the price increase while shutting off the faucets. It’s a crude mechanism that would only be controversial in the normal course of events. These are not typical times.
The Strait of Hormuz is already under pressure from the ongoing regional conflict — tanker traffic disrupted, shipping lanes rerouted, insurers raising premiums that eventually show up in the price of nearly everything. Saudi Arabia has decided to further restrict supply in this already tense environment. As a result, prices are rising while economic growth stagnates, a situation that analysts are now publicly referring to as stagflation. The generation that experienced it in the 1970s has not forgotten.
It’s important to consider the true meaning of 6.7 million barrels per day. That is approximately the total daily output of Iraq and the UAE at their peak; it is not a rounding error. To put it simply, removing that volume from a tight market during a time of supply disruption caused by conflict is like adding gasoline to a fire. The price of crude increased by almost thirty percent. The majority of economies that depend on oil imports took that increase like a punch to the chest.
Some Washington and Brussels policymakers seem to have anticipated some moderation from Riyadh. That expectation now seems naive. There have previously been tense exchanges between Saudi Arabia and the US over OPEC+ decisions; the October 2022 dispute over the 2 million barrel per day cut was especially painful, with Saudi officials dismissing the complaint as political meddling and the White House claiming it would harm the world economy. With greater stakes and on a bigger scale, the same pattern is emerging once more.
For Russia, the situation is especially harmful. Moscow’s economy is booming in a risky way; this year, defense and security spending is predicted to make up about 40% of all federal spending. Every day, the war in Ukraine costs money, and a disproportionate amount of that money comes from oil earnings. In the past, 35 to 40 percent of Russia’s federal budget has come from oil and gas. Moscow used a fleet of unregistered tankers to get around the G7’s $60 price cap, which was intended to squeeze precisely this pressure point. However, it would be more difficult to avoid a demand collapse brought on by Saudi overproduction.
It’s not a coincidence. Low oil prices would specifically hinder Russia’s ability to finance its military operations, according to analysts at the London School of Economics. This dynamic may be involved in some Saudi calculations, where flooding the market or making credible threats to do so serves geopolitical objectives beyond simple budget optimization. According to reports, the kingdom has hinted that if OPEC members don’t adhere to established production limits, crude prices could drop as low as $50 per barrel. One of those overproducers is Russia.
The recent precedent is sobering. An open oil price war broke out in March 2020 as a result of a dispute between Riyadh and Moscow over production targets. At the same time, both countries flooded the market. The brief decline in WTI crude was so unusual that traders who witnessed it still talk about it in the same way that pilots talk about near-misses. Demand was already severely damaged by the COVID pandemic, and it was further damaged by the price war. Tanks of storage fill up. At considerable expense, production had to be stopped. It’s possible that the same fundamental power struggle is being rehearsed in a different setting with different underlying pressures.
It’s difficult to ignore the asymmetry at play as you watch this develop. Consuming countries like the United States, Japan, India, and Germany bear the brunt of high oil prices. Smaller Gulf states and producing countries like Russia suffer the most when prices plummet, as they did in 2020. Saudi Arabia is in a unique position because of its large reserves and low production costs, which allow it to withstand low prices for a longer period of time than nearly everyone else. Riyadh has never been afraid to use that kind of leverage.
Although they are not as severe as they were in 2020, the immediate victims of the current cuts are nonetheless real. Global supply chains lose time and money when shipping lanes are rerouted to Yanbu. Increases in fuel prices have an impact on manufacturing, agriculture, and trucking. What appeared to be a final slowdown in inflation has gained new momentum. Rate-cutting central banks are now changing their minds. It’s still unclear if the economic drag will be severe enough to send major economies into recession or if it will continue to be a grim, miserable drag that feels like a disaster even though it doesn’t quite fit that description.
The fact that Saudi Arabia’s oil production strategy was not created with the welfare of the world in mind is becoming more and more evident. It is intended to sustain domestic stability, keep Saudi Arabia solvent, finance the NEOM risk, and potentially manage geopolitical ties in ways that aren’t always evident in press releases. This is how the kingdom has always functioned. The world’s buffer capacity, which includes strategic reserves, flexible producers, and spare supply, is now thinner than it has been in years. A calculation error is less likely to be tolerated.
In the end, both sides had more to lose by continuing than by stopping, which led to the end of the 2020 price war. That reasoning might reappear. However, the world is paying in the interim—at the gas pump, at the register, and in the updated growth projections of finance ministries that are discreetly recalculating what this year was expected to look like.
