FOR the OPEC+ oil cartel, wars are business as usual. In fact, wars among its own members are pretty normal, too.
Iran and Iraq remained OPEC allies-cum-rivals during their 1980-1988 war. The oil ministers of Iraq and Kuwait sat down at the same table even after Baghdad invaded its neighbour in 1990. And today, Saudi Arabia and Iran talk about oil even when Riyadh said that Tehran sponsors the Yemeni Houthis that are throwing missiles at the kingdom.
With this kind of history, any expectation that OPEC would simply break its oil alliance with Russia over a war is myopic. For the group of oil producers, Russia is today still essential partner.
When United Arab Emirates Oil Minister Suhail Al-Mazrouei was asked this week about the politics of working with Moscow, he shrugged his shoulders. “We have been there,” he said. “We have seen wars.”
Saudi Oil Minister Prince Abdulaziz bin Salman was more caustic. Asked how he can trust Moscow at this week’s OPEC+ meeting, he pointed to the recent missile attacks on the kingdom, including one that last week that hit a fuel depot owned by Saudi Arabian Oil Co in Jeddah. “I ask you: Who’s been throwing rockets and missiles at us?” he asked. “Who’s financing, who’s training, who’s supplying these weapons — it’s a member of OPEC,” he added, leaving everyone guessing that he was talking about Iran.
The message was clear: If Saudi Arabia can talk to Iran, surely it can talk to Russia, which is at war, but not with the kingdom.
OPEC’s warmongering past has been useful in justifying why the cartel is maintaining its relations with Moscow. But this is merely a convenient excuse. Saudi Arabia certainly wants to keep the relationship with Russia, which the kingdom considers one of its biggest diplomatic achievements. Alongside an improved rapport with China, the alliance with Moscow has allowed the kingdom to
rebalance its traditional dependence on Washington. That’s particularly helpful at a time when Riyadh and the White House are at odds on many fronts.
Russia brings more than 11 million barrels a day (bpd) of production (more than one-tenth of global oil output) to the group. And two other non-OPEC nations in Moscow’s orbit — Kazakhstan and Azerbaijan — contribute as well, with another two million bpd.
The kingdom had also worked very hard to convince Russia to join forces. Saudi Arabia long ago came to the realisation that without Russia, OPEC wouldn’t work and the flow of petrodollars into Saudi coffers would be at risk.
In his memoirs, Ali Naimi, who was the Saudi oil minister for two decades until 2016, said one of his aides asked him in November 2014 what was the chance of Russia cutting output. “I held up my right hand and made the sign for zero,” he wrote. And Naimi explained that without Russia, OPEC didn’t have a future controlling oil prices. “The oil market is much bigger than just OPEC (…) If we, Saudi Arabia, or
OPEC as a whole, cut production without the participation of major non-OPEC members, we would be sacrificing revenues as well as market share,” Naimi wrote.
The kingdom failed to draw Russia into partnership until December 2016, when Saudi Crown Prince Mohammed bin Salman personally held talks with Vladimir Putin and paved the way to an agreement. With Russia onboard, the enlarged OPEC+ controls now slightly more than 50% of the world’s oil output.
Today, OPEC can do without Russia. Oil is trading well above US$100 (RM421) a barrel. If anything, the market today is short of crude.
But oil diplomacy thinks long-term. Everyone in Saudi Arabia knows that oil is cyclical. The next economic recession, which may come as early as this year, could push the oil market into oversupply. In Riyadh, no one thinks that Iranian or Venezuelan oil — which remain under American sanctions — will stay outside of the market forever. The very same market that’s screaming for extra supply today may eventually need production cuts.
Whenever that happens, Riyadh wants Russia alongside it. Having spent years courting Moscow, the kingdom isn’t about to abandon it. And Saudi Arabia is far from alone. Russia still has friends from Brazil to China, and from India to Indonesia.
For OPEC+, it means that the group won’t change its plans. As it agreed months ago, with the support of Moscow, the group would add, on paper, another 400,000-plus bpd every month until September.
In reality, it’s adding far less than that, as many OPEC+ countries are unable to raise production and Russian own output is now falling. OPEC has a deal in place with Russia until the end of December. Beyond that, a new one would be need to be negotiated.
For Saudi Arabia and others to break with Russia, they would need a better alternative. But none has been offered yet.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.