First Russia tossed a hand grenade. Then Saudi Arabia dropped a bomb. A petroleum price war exploded in March after the dramatic collapse of an alliance between the OPEC cartel and Russia, a pact that had underpinned world oil markets for three years. The price of oil plunged more than 50% in the days after the bustup and then began to swing violently, sending shockwaves through a global economy already reeling from the fallout of the coronavirus pandemic. By early April, there were signs the mayhem might drive a rethink -- or even an unprecedented global plan to cut production.

1. What’s this bustup about?

Russia had joined forces with OPEC in 2016, along with nine other non-member countries, and the group controlled almost half of the world’s oil production. The “OPEC+” pact led to a resurgence of the cartel, which wields immense power over the world’s most critical commodity. The blowup came after Russia refused to go along with production cuts pushed by Saudi Arabia at a March 6 meeting in Vienna. The kingdom -- OPEC’s biggest producer and its driving force -- wanted to trim output further to prop up prices as the coronavirus ravaged demand. Saudi Arabia’s state-owned oil behemoth responded aggressively just hours later, reversing course and opening the taps.

2. What led to the rethink?

As the pandemic stretched on, there were estimates that it could knock out as much as a third of global oil demand. The slump in prices threatened millions of jobs and the political stability of oil-dependent nations. On April 2, U.S. President Donald Trump called for a coordinated production cut, and the first meeting of the OPEC+ members since the breakdown was hastily scheduled for April 6. Saudi Arabia wants the gathering, held by video conference, to include producers from outside that group and to reach a “fair agreement” to reduce oil supplies. To be sure, there are still many obstacles to a truce.

3. How did we get here?

Talks between Russia and the 13-member Organization of Petroleum Exporting Countries broke down because the country didn’t want to be strong-armed into further cuts to its lucrative oil production. It complained that the deal with OPEC, which has been managing global oil supply since 1960, had aided America’s shale industry. Russia was also increasingly angry with the willingness of Trump to employ energy as a political tool. It was irked by the use of U.S. sanctions to prevent the completion of a pipeline linking Siberia’s gas fields with Germany, known as Nord Stream 2.

4. What does this have to do with shale?

The Kremlin was reluctant to cede further market share to U.S. shale drillers -- known as frackers -- that have been adding millions of barrels of oil to the global markets. An attack on shale has been tried before: When the new technique was expanding in 2014, Saudi Arabia’s strategy was to flood the market, expecting that a collapse in prices would thwart the new competition. As shale producers found cheaper ways to operate and a global supply glut dragged on, OPEC then returned to its traditional tool of constraining output, sending oil to a four-year high of more than $85 a barrel by mid-2018. The victory proved self-defeating. Higher prices re-invigorated U.S. fracking, propelling the U.S. to overtake Saudi Arabia and Russia as the world’s No. 1 crude producer.

5. Can the U.S. live with lower prices?

Many drillers in Texas and other shale regions look vulnerable, as they’re overly indebted and already battered by rock-bottom natural gas prices. The price of oil tumbled to less than $25 a barrel in the days following the OPEC+ bustup. That prompted the main oil regulator in Texas to consider whether the state should curb crude production for the first time in nearly half a century in a coordinated effort with Saudi Arabia and Russia to calm the market and stave off a total industry meltdown.

6. Can Russia and Saudi Arabia live with lower prices?

That remains to be seen. In the short run, Russia is in a good position to withstand a price slump. Its government budget breaks even at a price of $42 a barrel and it has squirreled away billions of dollars in a rainy-day fund. Saudi Arabia, which is almost entirely dependent on oil to fund lavish government spending, holds about $500 billion in foreign currency reserves to cushion the blow. One source of potential stress: The kingdom’s currency, the riyal, has been pegged to the U.S. dollar for more than three decades, providing economic and financial stability. OPEC has a built-in competitive advantage, since its Middle Eastern members can produce crude at about a third of the cost of U.S. shale.

7. What about other countries?

Such a dramatic crash in the price of oil, if it were sustained, would savage national budgets of petro-states from Venezuela to Nigeria to Iran, threatening to upend politics around the world. To policy makers, volatile oil prices are an added complication as they try to shield economies from the impact of the coronavirus epidemic.

8. What’s the wider fallout?

There are winners from rock-bottom oil prices -- among them China, the world’s largest oil importer, whose recovery from the virus will be key for the global economy. The U.S. -- once a beneficiary of low oil prices -- is now an exporter rather than a buyer. Sudden surges in oil prices are feared because of the way they could jack up costs across the global economy and slow economic growth. Now a world reeling from an economic slump triggered by the virus is enduring another sort of oil shock.

For more articles like this, please visit us at bloomberg.com

©2020 Bloomberg L.P.