When global stock markets tanked last week, most analysts blamed the new coronavirus outbreak. The pandemic contributed to the plunge but equally, if not more, important was the oil price war that erupted between Saudi Arabia and Russia. The two oil producers are slugging it out over market share, but the fight looks like a personal struggle between the leaders of the two states as well as a broadside at the U.S. fracking industry.

The timing could not be worse. Oil is flooding the market just as demand is collapsing because of the COVID-19. Consumers might temporarily benefit, but the disruption is so severe that there will likely be no winners in this fight.

Three years ago, the Organization of Petroleum Exporting Countries and 10 nonmember oil-producing countries agreed to coordinate production to reduce a supply glut. At the heart of “OPEC plus” (as the deal was known) was a meeting of the minds between Saudi Arabia and Russia, the world’s second- and third-largest oil producers, to restrain their output and put a floor on prices. In the face of weak global demand, the group agreed earlier this year to production cuts that were set to expire at the end of March. With demand plummeting still further because of the coronavirus outbreak, Saudi Arabia called on OPEC members to cut another 1 million barrels per day, with the other 10 countries reducing their own supply by half a million barrels per day.

Russia rejected the proposal. Instead of compromising, the Riyadh government took a hard line to teach Moscow a lesson. It reversed course and announced that it would boost output by more than 25 percent (the equivalent of more than 3.5 million barrels per day) and then poked Moscow in the eye by offering big discounts to some of Russia’s most important customers. Russia responded by announcing that it too would increase production and markets swooned, with prices dropping more than 30 percent, the biggest fall since 1991, before making a slight recovery. Analysts reckon the slugfest erased $20 trillion from the value of world oil reserves and wiped out billions of dollars of market value throughout the industry. One analyst called it “the nuclear version of a price war.”

While articulated as an oil agreement, the “OPEC plus” arrangement at its core was a geopolitical strategy by which Russian President Vladimir Putin courted Saudi Crown Prince Mohammed bin Salman in an attempt to extend Russian influence into the Persian Gulf region. Putin has visibly embraced the Saudi heir-apparent in recent years as most other world leaders shied away in the aftermath of the murder of journalist Jamal Khashoggi and questionable foreign policy gambits. The limits of that strategy were revealed with the Saudi rejection of Russian calls for a new approach to global oil production.

Russian thinking is driven by two concerns, both of which involve the United States. The first is anger triggered by Washington’s sanctions against Russian energy companies. The administration of U.S. President Donald Trump last year imposed measures that aimed to halt construction of the Nord Stream 2 pipeline that will ship Russian gas to Europe and earlier this year leveled sanctions against a subsidiary of Rosneft, the Russian state oil company, for doing business with Venezuela.

That reportedly infuriated Igor Sechin, head of Rosneft and a close friend of Putin’s, who has challenged any policy that reduces production, arguing that it benefits U.S. shale oil producers at Russia’s expense.

That charge is true: Higher prices make fracking profitable and that has turned the U.S. into the world’s largest oil producer, surpassing both Saudi Arabia and Russia in output. As soon as those two giants began their war, U.S. shale producers began to cut back. Analysts forecast that current prices would shrink production by as much as 2 million barrels per day and push many U.S. producers into bankruptcy.

The oil glut is occurring as global demand is shrinking for the first time since 2009. In its most recent forecast, the International Energy Agency revised its outlook and now anticipates global demand will shrink by 2.5 million barrels per day in the first quarter of 2020.

Normally, governments of oil-consuming nations and consumers around the world would celebrate these developments. Cheaper oil lowers fuel costs, which play a huge role in daily expenses. Non-energy businesses benefit as well, airlines in particular.

There can be too much of a good thing, however. The stock prices of energy companies have plummeted, taking global indexes down with them. In the U.S. — and elsewhere — banks and other financial institutions are heavily invested in those companies and hold their shares, ensuring that pains felt by the energy sector are distributed throughout the economy. Since a significant amount of U.S. capital spending is associated with the energy industry, weakness will increase the chances of recession. There is also fear that lower energy prices will compound deflationary pressures that already bedevil national economies.

Saudi Arabia and Russia can both survive the price war, at least for a while. (The official estimate is that Russia can weather oil prices of $25 to $30 a barrel for six to 10 years; political pressures will begin to rise in a few months, however.) Other producers will be harder hit and government debt is expected to grow. Iraq will be punished, which is the last thing that country needs. Asian oil producers — Australia, Indonesia, Malaysia, Brunei and Vietnam — will also suffer. Reduced oil revenues will hurt countries without oil reserves such as Yemen, Syria and Lebanon, since they rely on aid from oil producing governments.

The price war will also have a potentially devastating impact on plans to reduce reliance on fossil fuels. Cheap oil makes replacement technologies less attractive, which will undermine efforts to fight global warming.

For Japan, which imports virtually all its energy supplies, the Russia-Saudi slugfest is a mixed blessing. Cheap oil is welcome as the economy struggles with the impact of the coronavirus outbreak. Lower prices help consumers and businesses, but since energy costs have been one of the few sources of inflationary pressure, economic policymakers are ambivalent: Oil price declines reinforce deflation, which the Japanese government is desperate to end.

Other parts of the government see opportunity. The Ministry of Economy, Trade and Industry’s new international resources strategy, which is expected to win government approval later this month, aims to help Southeast Asian nations develop their own petroleum reserves. Lower oil prices facilitate that goal, which will consolidate Tokyo’s standing as a partner and source of assistance. There will be more opportunities to develop those and other partnerships as Russia and Saudi Arabia continue to battle for supremacy in global oil markets.

Brad Glosserman is deputy director of and visiting professor at the Center for Rule Making Strategies at Tama University as well as senior adviser (nonresident) at Pacific Forum. He is the author of “Peak Japan: The End of Great Ambitions.”

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