Opec declared that it was in "crisis mode" yesterday as the oil cartel's game of bluff with Russia over production cuts continued to point to a price war.
Kuwaiti oil minister Adel al-Sabah raised the prospect of a collapse in oil prices to $10 a barrel, a price last seen in 1998, if non-Opec nations refused to help shoulder the burden of oil supply curbs.
"Reaching $10 will be a hard hit for all of us and even harder for those with a higher cost of production," he said, indicating that Russia would lose more from the show-down.
The disarray at Opec sent crude oil below $17 a barrel yesterday for the first time in more than two years. On Wednesday the organisation refused to make a widely expected 1.5 million barrels a day reduction in output, insisting that producers outside Opec – especially Russia – reciprocate with a 500,000 barrels a day production cut.
Mr al-Sabah said there was no floor to prices and added: "If Opec doesn't maintain the prices there is every reason to co-operate. It is an offer that is hard to refuse. The alternative is rather grave to everyone, including Russia."
Opec has always suffered from "free riders" – producers outside the cartel that use its supply reductions as an opportunity to raise their output. Over the past two years, Russia, a non-Opec country and the world's second-biggest producer, has raised its supply aggressively. Saudi Arabia, the biggest oil power, is now leading a back-lash against Russia. The kingdom's oil minister, Ali al-Naimi, said: "We are in a crisis mode and we need help.... We make the appeal especially to Russia, to heed the lessons of the past....this course of action is disastrous and will lead us to a loss."
Saudi Arabia depends on oil for about 75 per cent of government revenue. With an extensive social welfare programme to maintain and debt running at more than 100 per cent of GDP, the country needs to keep the oil price well over $20 a barrel.
Hania Farhan, of the Economist Intelligence Unit, said: "Saudi Arabia will have to think about cuts to its social support system, which will play very badly with a population used to being looked after. However, they do have a war chest from the high oil prices we were seeing, which should see them through a year at least."
The International Energy Agency, the energy watchdog, warned that Russia could damage its already fragile reputation with international investors, if it accedes to Opec's wishes.
The executive director of the IEA, Robert Priddle, said: "A secure Russian energy economy future depends on a more liberalised market, a market where foreign investors have got confidence...we would argue against any arbitrary interference with production of those who have established rights."
Amir Ben-Gacem, an economist at HSBC, said: "Russia can face $14 oil and live with that, for a year or so until the world economy picks up, because it is much less dependent on oil. For the Arab states, a $1 shift in the price has a significant impact on government revenues."
Russia has so far pledged only a token 30,000 barrels a day cut, reluctant to pull back on exports that provide a foreign currency lifeline to the debt-strapped government. However, over the winter, Russian exports always drop anyway, as much greater quantities are used at home to see people through the cold season.