Saudi Arabia’s oil spat with Russia throws a spanner into the works of the Kingdom’s long-standing effort to hedge its bets, a strategy that has taken on added significance as the Gulf comes to grips with the likelihood that the region’s security architecture will fundamentally change.
Saudi Arabia, despite a primary focus on close ties to the United States, has increasingly sought to put its eggs in multiple baskets by initially forging closer military and economic relations with Britain, France, and Germany, and more recently with Russia and China.
Saudi Arabia, has increasingly sought to put its eggs in multiple baskets, forging closer military and economic relations with Russia and China.
The Saudi strategy, stemming from mounting doubts about the reliability of the United States as an ally and protector of last resort, was showcased when China opened its first overseas defense production facility in Saudi Arabia for the manufacturing of the CH-4 Caihong, or Rainbow drone, as well as associated equipment.
The CH-4 is comparable to the US armed MQ-9 Reaper drone that Washington has refused to sell to the Kingdom.
Saudi Arabia’s willingness to undermine its hedging strategy by challenging Russia’s refusal to continue to align its production levels with that of the Organization of Oil Exporting Countries (OPEC) follows the Kingdom’s bowing to US pressure to acquire Lockheed Martin’s Terminal High Altitude Area Defense (THAAD) system rather than Russia’s S-400 anti-aircraft and anti-missile weapon.
Russian President Vladimir Putin made a last-ditch sales pitch last September after the Kingdom’s six battalions of US-made Patriot batteries failed to detect drone and missile attacks on two of the country’s key oil facilities that knocked out half of its production capacity.
The decision by Mohammed bin Salman, known by his initials MbS, to confront Russia stemmed from a stark choice confronting the Crown Prince: endanger relations with the only power to have put forward a regional security plan that would have allowed the Kingdom to hedge its bets while maintaining close ties to the United States, or drive oil prices down in a bid to force Russia to coordinate production levels that would ensure a higher price.
Ultimately, the Crown Prince’s choice was driven by economics rather than longer-term security.
Low oil prices have already forced the Kingdom to borrow from international financial markets. $80 USD per barrel is the price it needs to balance its budget. It is also the price MbS needs for his ambitious plans to diversify and mainstream the Saudi economy and turn it into a cutting edge 21st century knowledge hub.
MbS may in some respects have shot himself in the foot even if his assumption proves correct that the Kingdom could win a price and production war and that Russian President Vladimir Putin would see a longer term move from a unipolar to a multilateral security arrangement in the Gulf as too big a prize to lose.
Last year’s limited initial public offering (IPO) on the Saudi stock exchange by Aramco, the Kingdom’s national oil company, that constituted a crown jewel in MbS’ economic reform plans, failed to convincingly address fears that it was subject to the whims of the Kingdom’s ruling elite.
The oil war with Russia may have convinced investors’ worst fears with Aramco raising capacity and production to help MbS with his gamble.
The war with Russia may have convinced investors’ worst fears with Aramco raising capacity and production to help MbS with his gamble.
“This has proved to investors that their worst fears about Aramco were a reality. The company’s plans and its output decisions are based on MbS’ erratic behavior,” said a Saudi official familiar with Aramco’s offering.
MbS may not be the only one to suffer consequences of the oil war but his may be a tougher struggle because it involves restoration of trust.
The setback for US shale oil companies that need a relatively high oil price to break even, the reason Russia was willing to go to war with Saudi Arabia, is likely to be temporary as was evident in 2014 when Saudi Arabia gunned for market share rather than price to drive American producers out of business.
A protracted crude oil price war on the supply side, combined with the simultaneous demand shock caused by Covid-19’s impact on economic activity, will hurt oil producers everywhere.
“A protracted crude oil price war on the supply side, combined with the simultaneous demand shock caused by Covid-19’s impact on economic activity, will hurt oil producers everywhere,” said Tilak K. Doshi, an energy scholar at the National University of Singapore’s Middle East Institute.
If the Crown Prince’s decision was driven by domestic considerations, so was Mr. Putin’s.
Yet, despite believing that OPEC had outlived its utility, Mr. Putin was taken aback by the ferocity of Saudi Arabia’s response to the Russian cancellation of its earlier production level agreement with OPEC, prompting Moscow to call for a return to the agreed levels for the first quarter of this year.
“OPEC is finished, so is any attempt to ‘manage’ the oil market. US shale (as a fully privately owned industry) operates on aggressive free market principals. The Russians understand that and so does Saudi. The energy game (including alternatives) is now a survival of the fittest,” tweeted Ali Shihabi, a banker-turned-pro-Saudi-political commentator.
In Russia, MbS is up against an opponent that could prove to have a longer breath.
By Dr James M. Dorsey
Source: Inside Arabia