Towards an oil agreement between Saudi Arabia and the United States?
The Polish philosopher and writer Zygmunt Bauman has repeatedly warned that “all measures taken in the name of 'rescuing the economy' become, as if touched by a magic wand, in measures that serve to enrich the rich and impoverish the poor”. Bauman's philosophy was confirmed in early March when world oil prices collapsed, after a new wound opened up between two of the world's major oil producers - Russia and Saudi Arabia - over how to respond to the possible effects of the coronavirus outbreak. Unhealed wounds can lead to disastrous consequences, as happened just a few weeks ago when the gap between these two countries brought the world economy to the brink.
The story of this crisis began to unfold on March 6. On that day, a meeting took place between the Organization of Petroleum Exporting Countries (OPEC) and ten other oil-producing countries (known as OPEC+). At that meeting, where the possible impact of COVID-19 on the industry was discussed, Saudi Arabia failed to convince Russia to implement a number of production cuts to counteract the drop-in demand. Riyadh responded in just a few hours by bringing oil prices down to unexpected levels. The price war had begun, but this was only the beginning. Saudi Arabia reduced the official sales price by more than six dollars (from $14 to $8) in just a few hours and also began threatening to increase its production, in an effort to put pressure on Russia.
This price war is part of the history of the coronavirus pandemic. In a series of interviews with various Atlantic Council experts on oil and the way forward in this industry, Randolph Bell, director of the Atlantic Council's global energy center and president of Richard Morningstar for global energy security, believes that this conflict is best understood as a geopolitical confrontation that will strengthen the U.S. position in the oil market. “The coronavirus-induced drop in world oil prices laid the groundwork for the collapse of the OPEC+ agreement,” he warned. However, in his opinion, the impact of the coronavirus has been just one of many events that could have triggered this price war.
Furthermore, Randolph Bell considers, as he has stated in an article published on the Atlantic Council's own website, that Russia ignored OPEC's plan to “punish” US shale producers in retaliation for US sanctions on both the Nord Stream 2 oil pipeline and Rosneft for their work in Venezuela. “Both the Russian-Saudi relationship and the freedom of the United States to impose energy-related sanctions are a direct result of the growth of US production,” he said.
The director of the Atlantic Council's Eurasia Centre, John Herbst, believes that Moscow's decision of not doing what was agreed by OPEC is based on purely economic causes. “Russia's economy has been stagnant since 2013 - well before the sanctions and when the barrel of oil still exceeded 100 dollars - and has hardly grown since then. After the gross domestic product (GDP) fell in 2015, growth has been anaemic: 0.329% in 2016 and only 2.26% in 2018,” he explained. John Herbst believes that “American ingenuity in developing shale production has put it in an enviable position no matter what happens in the oil market”.
Even so, Herbst believes, referring to the Spanish proverb, that two don't fight if one doesn't want to. “As the OPEC producer of choice, Saudi Arabia has a long history of enacting production cuts when global oil demand is weak to prop up prices, as long as its partners are also willing to limit production”. Riyadh's decision, according to Herbst, was “predictable”, while Moscow's will be a “failure”.
The deputy director of the Atlantic Council's Global Energy Centre, Reed Blakemore, believes that this will have “a very important geopolitical ripple effect”. “There are two trends worth noting here. The first is where the Russia/Saudi relationship is headed after the collapse of this oil alliance, and the second is what a price war means for the American giant”. Be that as it may, Blakemore believes that the big winner of this war will be China. “The possibility that the United States will be more distracted by the coronavirus crisis in the areas of trade and foreign policy could be good geopolitical news”.
“The alliance between Russia and OPEC seems to have collapsed dramatically, as it was probably always meant to,” warned Ellen Wald, a non-resident member of the Atlantic Council's global energy centre. In contrast to her colleague Blakemore, Ellen Wald believes that Russia will be the one to win this conflict. “Russian Energy Minister Alexander Novak and Russian President Vladimir Putin are experienced, tough and have no reason to capitulate, while Saudi Arabia and OPEC seem to really want to cut production,” she warned.
The coffers of the Government of Saudi Arabia - a country that is largely dependent on the oil industry - could be affected by low oil prices if the coronavirus crisis is prolonged over time. Even so, what worries researcher Ellen Wald most is that “more than 20 percent of the Saudi population is invested in Aramco and the price of Aramco shares is falling as a result of this news”, something that could influence the country's development.
The analyst Anders Aslund, a senior member of the Atlantic Council, explained that “the current decline in world oil prices will be deeper than in 2016 and more similar to the situation in 2008”. The economic crisis caused by the coronavirus pandemic could lead the world to demand less oil for a season. “The impact on the Russian economy is likely to be severe and long-lasting. In 2008, when the price of oil fell to $32 per barrel, the Russian stock market fell by 80 percent in dollar terms over the course of half a year. The Russian stock market never recovered from that blow. The question remains how much suffering the people of Russia are willing to endure. The Kremlin has seriously exaggerated its influence in both the Middle East and the oil market,” he concluded.
However, there is one agreement that could change everything and whose consequences could be disastrous. Over the last few days, rumours have started to appear about a possible agreement between Washington and Riyadh. This alliance would result in both countries - the largest producer and the largest exporter - taking over forty percent of the market, an alliance that would allow them to have a great deal of influence when it comes to setting prices. A week ago, the US president assured that he was ready to intervene to reduce tensions between Moscow and Riyadh. “We are aware of the adversities to which the immense oil sector of the United States has been subjected due to these prices,” said Peskov the Kremlin spokesman .
Dmitri Peskov has decided to decline Donald Trump's offer and has insisted that his relations with Saudi Arabia are good. “We don't think anyone should meddle in these relations,” he said. China has taken advantage of this price war and this institutional vacuum to gradually start to be more present in the Iraqi oil industry. In this context it should be noted that much of the Gulf region has ceased to be economically US and European territory. “In 2017, China already figured as one of the main destination countries for the exports - basically crude oil - of Oman (44%), Iran (28%), Iraq (20%), Kuwait (17%), Saudi Arabia (12%), Qatar (11%), Bahrain (7%) and the Arab Emirates (5%),” warns Antoni Segura i Mas, president of CIDOB.
As China becomes more prominent in the region, the price war between Riyadh and Moscow highlights the disagreements over collaboration between Vladimir Putin and the Saudi Crown Prince. As the price of oil falls in the midst of a global economic crisis, the United States has greater geopolitical freedom to act. Will we see an inexorable loss of relevance for OPEC in the coming months? In any case, Washington, Riyadh, Moscow and Beijing have the challenge of minimizing the economic impact of the consequences of the coronavirus and to do so they have to consider something very important: the desired black gold.