Why Saudi Arabia Isn’t Giving Up On Its Russian Oil Alliance

Russian Foreign Minister, Sergei Lavrov, and his Saudi counterpart, Prince Faisal bin Farhan, met at length last week in Riyadh after which they released statements highlighting: “The level of cooperation in the OPEC+ format.” The two ministers underlined the: “Stabilising effect that tight coordination between Russia and Saudi Arabia in this strategically-important area has on the global hydrocarbon market.” 

Shortly afterward, the OPEC+ alliance, comprising all the OPEC member states plus most notably Russia, announced a theoretical increase in crude oil production – of 648,000 barrels per day (bpd) in July and August, instead of by 432,000 bpd as previously agreed. In practice, as it also includes Russian exports that are already banned by the U.S. and are being banned in the E.U., the increase is meaningless. Subsequent Saudi assurances that any deficit in Russia’s output caused by the ban will be met by other OPEC states is similarly meaningless in practical terms, given enduring question marks over genuine output capabilities

Any residual notion that Saudi Arabia might be trying to alleviate the economic problems of many countries resulting from high oil prices was dispelled over the weekend, as the Kingdom raised its official selling price for its flagship Arab Light crude to Asia to a US$6.50 per barrel (pb) premium for July to the average of the Oman and Dubai benchmarks, up from a premium of US$4.40 pb in June. The net effect of OPEC+’s production increase, therefore, will be zero, which Saudi Arabia, Russia, and all other OPEC members, know perfectly well. So, why is Saudi, for so long a staunch ally of the U.S. after the landmark relationship deal made in 1945, now so resolutely sticking with Washington’s long-time nemesis, Russia, even with the invasion of Ukraine still in full swing? 

The core of the answer lies in the immediate aftermath of the 2014-2016 Oil Price War launched by Saudi Arabia with the specific intention of destroying – or at least disabling for as long a period as possible – the then-nascent U.S. shale oil sector. In 2014, the Saudis had correctly identified this sector as the biggest threat to its finances and political power – both of which were, and still are – founded exclusively on its oil resources. In addition, but incorrectly at that point, the Saudis believed that the U.S. intended to cease, or at least significantly scale back, its on-the-ground support for Saudi Arabia in the region as Washington’s principal bulwark there against the increasing influence of Iran, Russia, and China. These fears in Riyadh were being stoked at that time by the ongoing talks of a ‘nuclear deal’ between the major powers, led by the U.S. itself, and Iran – Saudi Arabia’s longstanding nemesis. These talks did indeed result less than a year later in the Joint Comprehensive Plan of Action (JCPOA) deal that effectively brought Iran back into the mainstream of global political interplay.

Due mainly to the remarkable, and unexpected, ability of much of the U.S.’s shale oil companies to survive with oil prices that had been pushed extremely low through OPEC overproduction, the 2014-2016 Oil Price War resulted in devastation for the economy of Saudi Arabia and for its brother states in OPEC. An additional negative result for Saudi Arabia was that it had lost its credibility as the de facto leader of OPEC and that OPEC had lost its credibility as the indomitable force in global oil markets. This meant that OPEC’s pronouncements on future oil supply and demand levels – and therefore, on pricing – had lost much of their potency to move markets in and of themselves and that their joint production deals were diminished in effectiveness. 

In the interim, many of the positive rationales on both sides of the core 1945 agreement between the U.S. and Saudi Arabia had disappeared. The U.S. did not trust Saudi Arabia anymore not to go after its shale oil sector. It also did not trust Saudi Arabia to try to keep oil prices within the US$35-75 per barrel (pb) of Brent price band that was ideal for Washington: the first number being the floor at which many U.S. shale producers could at least breakeven, if not make a slight profit, and the second number being the cap after which extremely serious negative economic and political threats begin to emerge

For the U.S. economy, historical precedent highlights that every US$10 pb change in the crude oil price results in a 25-30 cent change in the price of a gallon of gasoline, and for every one cent that the U.S.’s average price of gasoline increases, more than US$1 billion per year in discretionary additional consumer spending is lost. Politically, as shown in my new book on the global oil markets, since World War I, the sitting U.S. president has won re-election only once out of seven times if the U.S. economy was in recession within two years of an upcoming election. President Biden – or whoever the Democratic candidate may be – will face another presidential election in 2024, but even before that, he faces critical mid-term elections in November 2022, when his Democrats could lose their narrow majority in the House of Representatives. 

For these reasons, the U.S.’s view had changed into the very one that Saudi Arabia had long feared. This was that Washington intended to cease, or at least significantly scale back, its on-the-ground support for Saudi Arabia in the region once it could ramp up its own oil production so that it did not need Saudi oil anymore, and once it had made other potentially Iran-countering alliances in the Middle East. This process in fact began with the ‘relationship normalisation’ deals drive begun in 2020. 

For Saudi Arabia in the immediate aftermath of the 2014-2016 Oil Price War, there appeared little choice but to stand by and watch as the U.S. inexorably increased its own shale oil and shale gas supplies and made new alliances in the Middle East, whilst all the while gradually reducing all elements of its support for the Kingdom. It is little wonder, then, that Saudi Arabia at the end of the 2014-2016 Oil Price War, grasped on to Russia’s offer of help. The Kremlin at that point was fully aware of the enormous economic and geopolitical possibilities that were available to it by becoming a core participant in the crude oil supply/demand/pricing nexus, so agreed to support the next OPEC production cut deal in what was to be called from then-on ‘OPEC+’.

This ‘unholy alliance’, as more than one source in Washington characterised it to OilPrice.com at the time, was of deep concern to the U.S., and served only to compound the growing feelings of distrust towards Saudi Arabia. These feelings were exacerbated when the Kingdom launched yet another oil price war in 2020 with the same intention as 2014-2016 of hurting the U.S.’s shale oil and shale gas sectors, which Washington perceived as a hostile act. These negative feelings have subsequently worsened due to several factors, with a key one being Saudi Arabia’s unwillingness or inability to do anything meaningful to bring down still-high oil prices. 

Riyadh for its part had ceased to regard the U.S. as a true friend in the world stage by 2016 and those in power now in Saudi Arabia, the al-Saud royal family, are also fully aware that the 1945 agreement – which crucially for them includes the U.S. supporting the family in its leadership position in the country – is no longer in play on Washington’s side. This can be inferred from Crown Prince Mohammed bin Salman’s refusal to even take a telephone call from President Joe Biden on the subject of enduring high oil prices. 

It can be argued that the only reason why Saudi Arabia has not yet gone even further in terms of political alliance with Russia than continuing to stand with it in OPEC+, is that it does not yet feel supported enough from the China-Russia axis to want to incur the full wrath of the U.S. The resuscitation by Washington of the ‘No Oil Producing or Exporting Cartels’ (NOPEC) bill is the surest sign yet that Washington has finally run out of patience with Riyadh. It has been – rightly – construed by Saudi Arabia as a warning shot to more profound further actions if it does move further directly and overtly into the China-Russia sphere of influence. However, Saudi Arabia’s plethora of deals with Russia since 2016, and with China too – plus its re-energising of the Gulf Cooperation Council within an apparently ‘Pan Arabist’ context – seem to portend an even clearer and decisive shift of Saudi Arabia and its own allies, including OPEC and OPEC+, away from the U.S. and towards China-Russia going forward.

By Simon Watkins for Oilprice.com

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