The collapse of the OPEC+ alliance and Saudi Arabia’s subsequent decision over the weekend to launch an all-out price war in crude has upended markets and further roiled a world already strained by the coronavirus crisis. There will be lasting consequences.

Oil prices plummeted 30% when futures trading opened Sunday night, a direct consequence of OPEC and Russia’s failed meeting on Friday. OPEC, led by Saudi Arabia, wanted to continue with its current production cuts and add an additional cut of 1.5 million barrels per day. Russia refused, causing a rift between OPEC and its non-OPEC partners, known as OPEC+. As a result, there was no agreement on any production cuts to combat the demand destruction and economic slowdown due to the novel coronavirus.

The next day, the Saudi Arabian national oil company Aramco notified its customers in Asia and the U.S. of deep discounts for April deliveries of oil. This was a shot across the bow against the Russian oil industry because the two compete in prime markets, particularly China. Saudi Arabia followed this up with plans to ramp up production to well above 10 million barrels a day — even going as high as a record 12 million barrels, Bloomberg News reported. Russia fired back on Monday morning, saying it would sell from its $150 billion sovereign wealth fund to bolster the ruble should oil prices remain in the $25 to $30 range for six to 10 years.

The dramatic reaction from oil markets wasn’t entirely unexpected, but there are significant geopolitical and economic implications to consider beyond simply the price of crude. Here are six thoughts on where I see things going from here:

  1. Saudi Arabia will experience lower revenue and may be compelled to make substantive changes to its ambitious government spending plans. Vision 2030, the government’s initiative to remake the Saudi economy, depends on vast amounts of government spending. Even though Saudi Arabia can produce oil at a cost of $2.80 per barrel, persistent prices in the $30 range will mean sacrificing big projects and investments to pay for day-to-day operations
  2. Russia’s revenue also will decline, but President Vladimir Putin will persist. Putin telegraphed Russia’s move early last week when he said that the current oil prices were acceptable for Russia’s budget. Russia always puts Russia first.
  3. Aramco, the Saudi national oil company that recently went public, will struggle to satisfy investors. As more domestic retail investors look to cash out come June, we could also see significant political disillusionment from a population that was enticed to invest by the government. There will be extreme pressure on the Saudi government to prop up Aramco’s share price, especially as the date for retail investors to cash in on their bonus shares approaches in June.
  4. U.S. shale firms will also have a difficult time. Some will close, some will struggle and there will be layoffs and consolidations. Financiers will have to determine whether they want to continue to participate. The oil majors operating in fracking regions will emerge solidly, but firms with more debt will suffer. However, there will also be investors and industry players who will see a period of low prices as an opportune time to buy in.
  5. Large, established international oil companies will have less incentive to invest in large-scale exploration and production projects that require large capital outlays and long lead times but produce large amounts of oil for extended periods of time. As a result, the threat of an oil supply shortage in the future will grow.
  6. China is actually getting a huge boost from low oil prices. An oil price war between Russia and Saudi Arabia (China’s two largest suppliers of oil) will act like a stimulus package for China at a time when it could be facing severe economic difficulties.

And here’s one overarching thought: These latest developments have ensured that even if the cause of the rift between Saudi Arabia and Russia — coronavirus— dissipates in the next few weeks, prices won’t easily recover.

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