The New Russia-Saudi Partnership Has Riyadh’s US Ally Over a Barrel
Oil realities in 2018
Donald Trump has Tweeted about a phone call to Saudi Arabia’s King Salman where the elderly monarch is said to have agreed to increase the production of oil to 2 million barrels per day so as to lower fuel prices in the United States, the world’s second largest energy consumer.
Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!
— Donald J. Trump (@realDonaldTrump) June 30, 2018
While Riyadh issued a statement affirming that the two leaders conducted a phone call regarding oil, Saudi Arabia did not confirm the figure of 2 million barrels per day that Trump cited. The reality that many in the US might not want to hear is that when it comes to the numbers, Saudi officials will not be confirming a final figure with the United States but with Russia. Indeed it is a new Russo-Saudi partnership in the form of OPEC+ that has much of the world over a barrel (of oil). Ultimately, this new partnership between the Wahhabi Kingdom and the Russian superpower will be good for geoeconomic and geopolitical multipolarity as it fundamentally alters which set of nations has the final say on the manipulation of energy prices.
To understand the significance of these new developments, one must remember that in 2014, the far-right US Senator John McCain called Russia “a gas station masquerading as a country”. The elderly McCain may be living to regret these words as it is now Russia’s petro-economy that gives Moscow the ability to leverage the US and its partners with almost the same capacity as the Chinese economic titan.
China and Russia – two superpowers with very difference leverage techniques against US threats
When compared with China, Russia generally has fewer tools at its disposal to leverage US threats, provocations and economic blackmail in the form of sanctions or tariffs. China of course has the ability to outproduce the US while building trading relations throughout the world that greatly minimise the threat of tariffs against China. While the US remains an incredibly important market for Chinese goods, the same can be said of much of the world. China’s rapidly growing and increasingly affluent domestic market also means that as a single market, China is already as valuable if not more valuable in some respects than the coveted American market. Then there is the fact that China holds more US debt than any single foreign power, while Chinese businesses also own billions in property and assets inside the United States. Furthermore, the looming threat of the Yuan becoming the world’s de-facto reserve currency before the end of the 21st century is certainly in the back of the heads of America’s more long-term minded policy makers.
By contrast, Russia’s more limited but still important means of leveraging US hostility have traditionally been limited to the military-security and related diplomatic fields. Russia has developed an effective strategy of using its military strength and excellence as an arms manufacturer to secure old Soviet partnerships while developing new multipolar partnerships with countries as diverse as Turkey, Pakistan, The Philippines, Saudi Arabia, “Israel” and multiple African states that Russia more or less abandoned (diplomatically and commercially speaking) in the turbulent 1990s.
Russia’s geopolitical strength
Russia’s ability to win new partners and expand traditional partnerships through the use of energy cooperation is also a major factor in Russia’s ability to win friends without ruffling regional feathers. A Russian built nuclear power plant in Turkey will be on-line in 2020 while Saudi Arabia also looks to Russia for assistance in building its own nuclear power plant.
Economically though, trade between Russia and the United States, even prior to the sanctions of the last four years was of little significance when compared to the trade that China conducts with the US. Now however, Russia has developed a format which will allow Moscow to gain significant leverage over the US in the all important area of oil.
Saudi Arabia not only needs but wants Russia
Saudi Arabia not only needs Russian expertise to help diversify its economy in-line with Crown Prince Muhammad bin Slamn’s Vision 2030 which will see the Kingdom and its partners construct a new mega-city on the Gulf of Aqaba to be called NEOM, but now Saudi Arabia needs Russia’s broad diplomatic and military clout to provide weight to OPEC+ so as to avoid the long-term value of oil plummeting without cessation. The OPEC+ format which in reality boils down to a Russo-Saudi partners is therefore beneficial for both sides, but in the short term, Saudi Arabia needs Russia on board more than the other way around. This is the case because the Russian economic remains more diverse than Saudi Arabia’s while Russia’s trading relations across the multipolar world are also vastly more diverse than Riyadh’s.
In order for Riyadh to maintain leverage against its western energy consuming partners in an age where oil has serious competition from other forms of energy, Russia has become a tailor made partner for Riyadh.
The game-changer that is OPEC+
The so-called OPEC+ format is designed to coordinate price controls and accompanying production output between the member states of OPEC and energy producing nations outside of the cartel. 2016 saw Russia becoming an important player in the OPEC+ format as Moscow and OPEC’s de-facto leader Saudi Arabia cut a deal to decrease oil production in order to stabilise the overall downturn in global oil prices.
This in turn led to the flourishing of a new era in Russo-Saudi relations that culminated in the first ever visit of a Saudi monarch to Russia in the autumn of 2017. This then lead to the present talks regarding Saudi Arabia’s desire to purchase Russia’s S-400 missile defence system as well as the prospect of Russia building Saudi Arabia’s first ever nuclear power plant.
In May of 2018, the 2017 OPEC+ deal which was recently extended became so successful that instead of merely cutting oil output by 1.8 million barrels per day, a combination of organically declining production from several OPEC states including Venezuela meant that production levels had fallen by 2.7 million barrels per day.
Because of this, Russia along with leading OPEC members including Saudi Arabia have agreed to voluntarily expand production by 1 million extra barrels of oil per day. This news will be welcomed both by China and the United States who have both voiced concerns about the OPEC+ production cuts making energy overly expensive. If the figure recently quoted by Donald Trump of an output extension of 2 million extra barrels per day is true, it is almost certain that the OPEC+ (aka Russo-Saudi partnership) had the final say.
This short term win-win deal that sees OPEC, Russia, China and the US uniquely on the same page is however symptomatic of the important role that Russia is now playing when it comes to determining global energy production rates and consequently the global price of oil.
Oil as a tool for geopolitical change
In 1973, the Arab dominated OPEC decided to embargo the western nations that supported Tel Aviv in the 1973 Arab-Israeli War. This exponentially increased the cost of oil, thus proving that nominally geopolitically weak OPEC states had a highly effective means of affecting economic realities in the US and much of Europe.
With the US taking steps to become more energy self-sufficient combined with the development of shale oil fracking which poses a challenge to the dominance of traditional well-drilling and an increase of global oil production output from non-OPEC members, a 1973 style embargo would not have the same effect if attempted in 2018. Nevertheless, the global price of oil remains largely determined by OPEC and now, OPEC+ agreements are able to create shockwaves across the global economy because of a near ironclad grip on the manipulation of energy prices by virtue of uniform production agreements.
Russia as OPEC+ kingmaker
Russia’s newfound home at the centre of the OPEC+ format therefore allows the Russian superpower to set global trends in energy prices. This development runs contrary to the thinking that Russia and OPEC could act as rivals in an endless game to see how can outsell the other’s supplies through a race to the bottom in terms of pricing. Instead, through cooperation, Russia has decided on foregoing a volume based rivalry with OPEC while embracing a united front of energy producing powers who can therefore better leverage major energy importers.
This means that just as OPEC has traditionally used geopolitical crises to justify the semi-artificial or fully-artificial inflating of global oil prices, Russia can now play this all important game of energy-chess along with OPEC. In times of easily reached agreements between Moscow and OPEC’s strongest members, this means that Russia is in effect an OPEC member in all but name. However, should Moscow and OPEC’s leaders ever reach a point where they cannot agree on price stabilisation mechanisms, Moscow retains a trump card against OPEC by reserving its right to defy OPEC production cuts or increases, thereby jeopardising the global effectiveness of future OPEC decisions.
While this allows Russia to leverage both the United States and OPEC depending on various scenarios, Russia is also now in a key position to accelerate the introduction of China’s Petroyuan as a viable alternative to the Petrodollar. Russia has closer relations with China than just about any OPEC member and consequently, Russia could use its powers as both a major energy exporter and as a close partner of China to guide OPEC into a gradual embrace of selling oil in the Chinese rather than the American currency.
Russia and the Petroyuan
As the world’s most powerful economy has throughout history been able to de-facto dictate what the world’s standard reserve and trading currency is, the rise of the Yuan vis-a-vis the US Dollar is simply a matter of ‘when’ rather than ‘if’. While China is acting gradually in this respect because of the favourable trading conditions stemming from the Dollar being more valuable than the Yuan, eventually China will float the Yuan and in line with China’s projected economic strength, the Yuan’s value will eventually outstrip the US Dollar.
When this happens, the Petrodollar will be replaced by the Petroyuan in any case, but before this happens, China is nevertheless keen to sign as many oil futures contracts as possible in its domestic currency. Russia is therefore in a key strategic position to play kingmaker when it comes to guiding OPEC into the inevitable (however gradual) position of selling oil to China and China’s close partners in Yuan. This is the case because Russia is in a position whereby it can cooperate with OPEC to leverage all major energy importers, while Russia can likewise cooperate with China to leverage OPEC towards a position that looks to the Yuan rather than the Dollar. Likewise, Russia could theoretically cooperate with both China and the United States against OPEC should the oil cartel conspire against the world’s two largest energy consumers.
Russia is therefore in a uniquely strong position to use its geopolitical weight as an energy producer and military superpower to hold the balance of power in respect of global energy prices and the alliances formed to manipulate these prices. For a country whose economy continues to be written off by many in the west, Moscow’s biggest economic advantage is the foreign policy independence that petro-geopolitics has transformed into a game changing phenomenon. Perhaps most crucially, for the first time in history, the country that holds the key to global oil prices in its hands is a country that along with China leads the ‘eastern’ side of the multipolar world. The impact of this will be felt for the remainder of the 21st century and beyond.