As the world’s most traded commodity, crude oil continues to exercise substantial leverage over the myriad geopolitical and geoeconomic imperatives that shape the global political economy. Following a rollercoaster ride that saw economies acclimating to a low oil price era, to witnessing a price rally that was speculated to breach the $100 (per barrel) mark, the new reality is one of price volatility across the international oil market. The politico-economic developments over the last few months have immensely contributed to this hovering state of affairs, with the ripple effects expected to continue onwards to the first quarter of 2019.
Back in November, the Trump administration’s issue of Iran sanctions-waivers to eight importing nations had only served to complement an already saturated oil market. This somewhat delayed an otherwise sudden plunge in Iranian crude exports. The incipient supply glut was the result of record production on the part of three of the world’s most significant oil producers: Saudi Arabia, Russia and the United States. While the Russians and the Saudis kept pumping barrels after barrels to make up for an anticipated shortfall in Iranian crude exports (besides the obvious goal of expanding their market share), the US shale industry on its part continued to bring out oil at breakneck speeds. Needless to say, with the Khashoggi affair lingering over their backs, the Saudis had little choice but to pump more oil or face the ire of the American government and risk jeopardizing their investments in the US. Add to this a spooked stock market, which as a knee-jerk reflex to the excessively high oil inventories and a strong dollar, not to mention the prospects of a prolonged trade war with China, responded with a panic-induced short-selling in energy-related stocks and securities.
Is the OPEC Imploding or Maturing?
To arrest the rapid price slide, Saudi Arabia and Russia were yet again pushed to take the lead in initiating production curbs. Their budding partnership has fructified since the inception of the OPEC-plus in 2016 and the successful compliance to production cuts that enabled the subsequent oil price recovery. Nevertheless, the OPEC-plus exposed the inherent divisiveness and loosening cohesion within the aging albeit increasingly fractious OPEC grouping. To elucidate, Iran, Iraq and Venezuela have often been the disenchanted ones whenever a production cut is in the offing. The troika has been facing manifold crises in their oil sectors for quite some time and any tactical compromise on export revenues is expectably met with partial-to-complete recalcitrance. Then one may look at Libya and Nigeria, two other significant member states where political instability, and as an extension, fluctuating oil production, has become a routine affair. Despite these emerging faultlines, the continuing cooperation between Saudi Arabia and Russia – the two largest producers within the expanded cartel – has so far managed to offset any lack of compliance from the disenfranchised lot. This has also taken some pressure off Saudi, which otherwise would have to shoulder the burden entirely upon itself – by virtue of its archetypal role as swing producer with a celebrated spare-production capacity and low domestic costs of production.
As a corollary, the strengthening partnership between Saudi Arabia and Russia is a sign of the former’s increasing inability to single-handedly balance the oil market, presumably in the light of a suspected decline in its spare-production capacity. But not everybody is content with the shifting power structure within the new OPEC. One of the foremost veterans of the cartel, Qatar, announced its exit from the grouping, sending shockwaves across the energy community and sparking speculations of a sooner-than-expected fragmentation of a once-formidable cohort that is believed to have become a spent force. The estrangement between Qatar and the Saudi-coterie (particularly comprising the UAE and Bahrain) seems to have no end in sight, and is understood to be the primary reason behind Qatar’s decision (contrary to its stated intention of focusing more on LNG). True that Qatar is an LNG powerhouse and oil constitutes only a small fraction of its exports, but the symbolism behind the move will no doubt drive sentiments in a market driven by speculations. This will in turn act as fodder for those wishing to write the obituary of OPEC, thereby spreading euphoria across the commodity and stock markets.
Be that as it may, the growing rifts within the OPEC had a bearing on the just-concluded Vienna meeting of the OPEC-plus. In spite of concurring interests with the Saudis, Russia was initially not committed to the collective production-cut target of 1.2 million barrels per day (bpd). However, following some behind-the-door negotiations, the Russians eventually fell in line with the Saudis, dismissing any rumors of possible tensions between the two oil megaliths. The initial intransigence on Russia’s part was reflective of the pell-mell production levels witnessed in October-November, for which all the leading producers of the cartel, including Saudi, Iraq and the UAE, while not to forget new players Russia and Kazakhstan, are to be equally blamed. Talks apart, all of them had virtually capitalized on the paranoia surrounding the Iran sanctions to expand their market share; lest one forget the elephant in the room – the United States – where the frackers continue to pump at record volumes, benefitting from a privatized deregulated oil sector with extremely generous investors and banks. Nevertheless, with the top producers of the OPEC-plus pledging to undertake the necessary production cuts, there is some hope of prices stabilizing over the coming months. But such hopes are virtually on thin ice as it still remains to be seen if the pledges will translate into total compliance. Besides, just the faintest of such optimistic forecasts could drive the shale industry into a continued production overdrive, potentially canceling out much of the gain that would be achieved by the gritty compliers of the OPEC-plus.
Saudi Arabia and the New Avatar: Bracing for Tougher Times?
In a transforming global energy landscape, both from a geoeconomic and geopolitical standpoint, the influence wielded by the US, Saudi and Russia is of paramount importance. This is in relation to the discernibly dwindling producing-cum-market-manipulating power of the old OPEC monopoly. Take the case of Saudi Arabia for instance. Some of the accusations against the Saudi Crown Prince Mohammed bin Salman (MBS) notwithstanding, his all-pervasive reforms to transform the domestic economy, particularly the oil sector, deserves careful appraisal. Among these is the creation of the Public Investment Fund (PIF): a new sovereign wealth fund poised to cater to the Crown Prince’s Vision 2030 project – one that seeks to gradually diversify, and at the same time, cushion the Saudi economy from its excessive reliance on oil and oil export revenues. Privatization of key assets, both inside and outside the energy sector, is another significant agenda of the industrial reforms. Though shrouded in uncertainty, the much-touted IPO of the national oil giant, Saudi Aramco, seems only to strengthen the ruling dispensation’s resolve to drastically reform its most important cash-cow. By facilitating foreign investments in hydrocarbon engineering and oilfield technologies, the Saudis are seeking to substantially reduce the breakeven costs of oil production and improve extraction and recovery from aging and mature fields. Clearly, the objective is to be better prepared for an inevitable era of cheap oil.
Part of the changing priorities of the Saudi energy strategy is the burgeoning investment in the downstream (refining, petrochemicals and retail) segment, not just domestically, but also across overseas destinations. Saudi Aramco recently acquired considerable stakes in the oil refining and petrochemical sectors of the United States, China, India and Indonesia; a wise move given the huge market potential and ever-expanding consumer base for petro-products in these countries. The Saudis had overlooked Russia as a prime investment destination for a good number of years. This was on account of the diverging geopolitical interests in West Asia and Russia’s own backyard, besides the risks of disrupting their time-tested strategic alliance with the United States. However, with the coming of an American President who values business above everything else and also faced with the relentless onslaught of the American shale might, the Saudis found some common ground with the Russian Bear. Since the inception of their newfound energy partnership, the Russian Direct Investment Fund (RDIF) and the Saudi PIF have vowed to facilitate investments across multiple segments straddling their respective energy sectors and elsewhere. Crucial among these are Saudi investments in the Russian petrochemical and LNG sectors and Russian technical assistance by means of advanced oilfield technology and services in Saudi Arabia’s upstream segment (oil exploration and production).
All said, in an age where transactional diplomacy has largely come to look down upon geopolitical fatalism, oil’s role as both a strategic resource and commodity has increasingly come into question. But the vectors and indices of oil production and commerce continue to permeate the multiple layers of the global political economy, and as a rule, will continue to exercise a cause-and-effect relationship on geopolitics and international relations. It is in the interest of the influential oil producers such as Saudi Arabia and Russia to maintain steady and stable oil prices (that are neither too high nor too low). This will help ensure a sustained long-term demand for a product that still dominates the clockwork of international commerce and politics. Likewise, the more experienced multinational and national oil majors are already riding a wave of technological innovation – one that has made previously difficult undertakings like deepwater and ultra-deepwater exploration more feasible.
As for the US, President Trump’s focus on re-industrializing America (through reenergizing energy exports) will time and again rub shoulders with the Federal Reserve’s recent obsession with high-interest rates (thereby increasing borrowing costs and making exports costlier). Looking on the bright side, such a dichotomy may help maintain a checks-and-balances mechanism on the possibility of unregulated domestic production by overzealous frackers. But then again, the ebbs and flows in a protracted US-China trade war, among other things, may continue to unleash tremors on the market; especially on the energy-related stocks whose fate is more or less sealed to the petrodollar. That means stakeholders across all ends of the oil-dominated energy spectrum – from producers to consumers, governments to energy companies, and investors to asset managers – must prepare for more volatility in the coming times.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Geopolitics.
The author is a Ph.D Candidate at the Department of Geopolitics and International Relations, Manipal Academy of Higher Education (Deemed-to-be-University), Karnataka, India. His primary research interests include the geopolitics of energy and natural resources, oil and gas, the Middle East, Trans-Caucasus and Central Asia.