The history of OPEC and how it came to wield such power is one of two entities. On one hand, is OPEC – a coalition of the world’s largest oil producers.
The Russia-Saudi Bromance
On the other, America, and to a lesser extent Europe, dependent on the former for energy. It worked in the 1970s, when the oil shocks proved the potency of supply restrictions. In the decades since then, OPEC has lost a lot of power. Sources of oil and gas have diversified. The USA is now on track to be a net exporter of crude and natural gas. Europe is charging towards a future that diminishes the need for hydrocarbons. And OPEC is no longer the biggest boy in town; Russia is now the world’s single largest oil producer – and has been China’s top oil supplier for several years now.
Back in 2015, as the energy industry was grappling with the aftermath of plunging prices, Russia stated that it had ‘no intention of cooperating with Saudi Arabia.’ Yet, just last week, the Saudi King Salman visited Russia. A joint US$1 billion fund was announced to invest in energy projects. In the space of two years, Russia has gone from OPEC’s main competitor to an unofficial co-president, brokering the current supply deal that has been credited for keeping oil prices stable (or at least, not plunging).
With Donald Trump’s presidency in the USA, former allies and enemies are looking to form new alliances. Even Angela Merkel was forced to admit that the EU now had to consider ‘a future without the USA.’ For Russia, the American presidency has been extremely challenging to work with, especially with the recent Congress-led sanctions. This bites down hard on Russia’s ability to do business. With the EU also threading a delicate relationship, Russia has to find new friends.
King Salman of Saudi Arabia does not do courtesy visits. His arrival in Russia – the first ever for a Saudi monarch – is a geopolitical earthquake.
It seals a strategic energy partnership that began a year ago, which has since blossomed into a new bromance – with Saudi Energy Minister Khalid al-Falih and Russian Energy Minister Alexander Novak presenting a united front. The announced US$1 billion fund is reportedly merely the ‘tip of the iceberg’, with more cooperation and joint ventures to be announced. Russia could use a lot of financial help in exploiting Arctic hydrocarbon resources – and with financial flows disrupted by American sanctions, can turn to Saudi Arabia’s deep pockets. This fits into the Saudi roadmap to expand its own infrastructure and industrial sector to diversify the economy. It also extends far beyond energy – Saudi Arabia agreed to a massive military equipment purchase from Russia, a fundamental shift in its military policy that has always sourced from the US and UK.
For Saudi Arabia, it is also an opportunity to win back power for OPEC. Cooperation with Russia is cooperation with OPEC by proxy. There are rumblings that this Saudi-Russia friendship could eventually lead to Russia becoming an official member of OPEC. It is halfway there already. The current OPEC supply freeze would not have been possible without Russian cooperation, and their help in convincing other major non-OPEC producers in Central Asia to reduce production. With the March 2018 expiry looming for the current deal, Russia is already signalling that it would like to extend the deal.
Alone, Saudi Arabia would face a challenge in this – there is a lot of conflict with other members like Iran, Iraq and Qatar. But add in Russia, and suddenly Saudi Arabia’s position becomes a whole lot more powerful, as it is able to throw its weight around like the good ol’ days in the 1970s. With US crude production rising, the main threat to Russian and Saudi oil fortunes is no longer each other, but America. A cooperation pact makes perfect sense. Which is exactly why this is now happening.
Join in on the conversation with Easwaran when you subscribe to PEAK DEMAND.