Russia Saudi Nexus and Global Oil Prices
Recently, Saudi Arabia and its OPEC Plus allies, including Russia, agreed to an unexpected drop in the oil supplies, which will result in the soaring up of oil prices worldwide. The move is seen as a rebuke to the statement made by United States President Joe Biden by travelling to Saudi Arabia to convince the world's largest oil producer to raise output and offset rising gasoline prices caused by Russia's invasion of Ukraine.
The US has accused Saudi Arabia of siding with Russia following a surprise decision by OPEC Plus to cut crude supply, keeping oil prices high at a time of global worry about inflation. Then, in response to the OPEC Plus decision, President Biden promised undefined "consequences." Then, last week, some US Democrats warned Saudi Arabia that if the kingdom did not alter its direction, they would impose a one-year moratorium on all military sales. The world's most significant oil exporter claims that the decision was made for economic reasons rather than political ones. The move is a watershed moment in Saudi Arabia's more than 70 year friendship with the United States.
The Organization for Petroleum Exporting Countries (OPEC) has been a recognised component of the oil market for decades, but the cause and consequence for this decision is significantly different. In addition to raising gasoline prices and hence inflation during economic instability, this measure evidently benefits Russia. After the European countries began to limit their imports from Russia, Moscow's oil revenue plummeted precipitously. Notably, while OPEC and OPEC+ nominally reduced output by 2 million barrels per day, Russia was already producing much below its limit, implying that this move would allow it to produce more oil at a higher price.
THE OIL WAR BETWEEN US AND SAUDI ARABIA
The conference of the 24 OPEC Plus oil producing countries, including Russia, occurs when most of the globe is already dealing with rising energy prices. A supply drop will further worsen relations between Saudi Arabia and the United States, where President Biden has been attempting to control gas prices ahead of the November mid-terms elections. OPEC and non-OPEC partners, known as OPEC Plus, agreed last week to cut oil output by 2 million barrels per day beginning in November. The decision is intended to boost oil prices, which had plummeted to below $80 per barrel from more than $120 in early June.
OPEC Plus was founded in 2016 by 13 members of the Organization of Petroleum Exporting Countries and 11 non-OPEC members. The company defended this move in a statement by citing "uncertainty surrounding the global economy and oil market outlook." It's unclear how much of a price hike would result from the supply decrease. Because the globe consumes up to 100 million barrels of oil every day, pulling 2 million off the market would have a significant impact. The decision is seen as Saudi Arabia's attempt to support prices, which had risen as high as $120 a barrel in the spring but had begun to decline owing to concerns about the global economy's deterioration. They fell below $90 per barrel in September. There is a widespread belief that the Saudis are attempting to restore oil prices to or above $100 per barrel by decreasing output and tightening the market. The action might be interpreted as a criticism of President Biden, who visited Saudi Arabia last summer to lobby for more production. This was despite Biden's previous assertions that the monarchy was a pariah state. He also openly implicated Saudi Crown Prince Mohammed bin Salman for Saudi writer Jamal Khashoggi's assassination at the Saudi Consulate in Istanbul in 2018.
The analysis of the reasons driving Russia's partnerships with the Gulf Cooperation Council (GCC) members often focuses on a broad desire throughout the area to hedge against the region's ostensibly deteriorating security ties with the United States. Some of these reasons may be legitimate but concluding that Russia and regional parties are setting themselves for the Kremlin to become a significant provider of security in the Persian Gulf, much alone supersede the US, would be an exaggeration. This ambivalence toward Russia explains why most Gulf Arab governments opted not to join the US or the European Union campaign to isolate and penalise Russia at the start of the Ukrainian conflict.
THE RUSSIA AND SAUDI NEXUS
The OPEC was established to force up oil prices in reaction to US import limitations and the enormous influence of multinational oil and gas businesses. Russia is a member of OPEC Plus, an extended club of oil exporters formed in 2016 to tackle substantial new threats to OPEC's capacity to regulate the market, such as the advent of the United States as a major exporter and the expansion of renewable energy.
The decision by Saudi Arabia would benefit Russia since decreasing output would raise the price of oil, allowing Moscow to fund its military campaign in the Ukrainian invasion. And it might put Europe's determination to help Ukraine to the test ahead of what experts predict would be a dramatic downturn in economic development throughout the continent. Higher gas prices might also strain American consumers, jeopardising the Biden administration's commitment to lowering gas prices before the 2022 midterm elections. The OPEC coalition's stance may potentially exacerbate inflationary pressures in the United States and Europe and undermine efforts to support Ukraine as it defends itself against Russian aggression. Russia relies heavily on gas and oil sales to fund its budget, and the output decrease will allow Moscow to sell oil at greater rates on the global market, producing more income for its war and army recruitment. A significant reduction in production would please Moscow, which would gain from both steadier, if not higher, crude prices and an implied show of unity from its OPEC Plus counterparts as it prepares for upcoming EU oil sanctions.
There were predictions that President Biden's trip to Jeddah would have pointed to a $500 million investment by a Saudi firm in Russian oil giants Gazprom, Rosneft, and Lukoil at the start of the Ukraine conflict or Riyadh's decision in the summer to double purchases of Russian oil for its power plants in order to free up more of its own crude for export. Meanwhile, Sheikh Mohammed bin Zayed Al Nahyan, the president of a key OPEC partner, the United Arab Emirates, paid a visit to Moscow last week for face-to-face discussions with Putin. This suggests that Saudi Arabia and its allies have taken a major turn toward Russia this year. Gulf leaders say that they must strike a balance between their relations with the United States and Russia, which plays a vital role in oil markets and regional crises ranging from Syria to Libya. Russia is also participating in talks with Iran and, unlike the US, does not condemn Saudi Arabia on human rights. Saudi Arabia and its regional allies have not supported sanctions on Moscow over the invasion of Ukraine, and officials privately fear that entirely isolating it may backfire. They are particularly sceptical of US efforts to penalise Russia using mechanisms such as price limits on its energy exports, which essentially shift pricing power from suppliers to purchasers. Meanwhile, US authorities are attempting to balance their attempts to penalise Russia with its inflationary consequences. And they're balancing their urgent demand for more OPEC oil with the rising aggravation of an uncooperative cartel that doesn't share their interests.
ANALYSIS AND CONCLUSION
OPEC Plus was also attempting to send a message to energy markets about the group's coherence amid the Ukraine crisis and its willingness to respond promptly to safeguard prices by limiting supply. And the European Union's initiative to lower prices appears to compete with OPEC Plus's move to boost oil prices. However, it is unclear how severe the reduction in oil output will be. Most OPEC Plus members consistently fall short of their output requirements due to a lack of investment and will not need to cut production significantly, if at all. The increased market action by the US and the European Union, such as the effort to put a price ceiling for Russian oil, may be pressuring OPEC Plus to act more aggressively. Russia wants a higher price to compensate for the substantial discounts it has had to provide in order to sell its oil. In its quest for higher oil prices, the Kremlin may be leveraging OPEC's de facto leader, Saudi Arabia, whose leaders seek future cooperation with Moscow on energy problems, to make sanctions against Russia more expensive.
Shifting global balances towards the East will have little impact on the trajectory of changes in Saudi Arabia and the Gulf Cooperation Council members, which are predominantly top-down and motivated by national economic aims rather than foreign policy alignments. The fact that Saudi Arabia, Russia, and the United States account for 42% of world output in 2021 implies that their connection will continue to influence oil markets in the foreseeable future. The current geopolitical context and the battle on fossil resources will favour deeper ties between Russia and Saudi Arabia above a connection between Saudi Arabia and the United States. This increases the likelihood of greater oil prices and volatility.
Regarding the US and Saudi ties, it is believed that this rift between the countries is not permanent, partially because the two nations' connection is much more firmly rooted in both of their institutions, and it can only be called as a "hairline fracture." Though, for the short term, it looks that this is excellent news for Russia and terrible news for the United States and its friends. But, a strained relationship with the United States and now the European Union might be bad for Saudi Arabia in the long run.
REFERENCES-
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Pic Courtsey-Akil Imran at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
