Oil prices have reached the $70-a-barrel mark, their highest since December 2014, but neither Saudi Arabia nor Russia is shouting with glee. That’s because it remains to be seen whether the oil market has achieved price stability for awhile.
Saudi Energy Minister Khalid al-Falih this month spoke of the “fragility of the market.” He noted that a much-anticipated initial public offering of Saudi Aramco stock will take place “when the time is right,” but declined to say about whether the IPO could be postponed to 2019.
{mosads}OPEC and non-OPEC powers such as Russia worked out a volume-cut deal last year that has played a key role in boosting prices. Al-Falih emphasized the importance of the deal, and hinted that it ought to be extended beyond 2018. But Russia has shown little enthusiasm for extending it.
Earlier this month, Russian Energy Minister Novak broached the idea of “a smooth exit” from the agreement. And Vagit Alekperov, the president of Russia’s largest oil producer, Lukoil, said Russia “had to leave the deal” once prices reached $70.
A recent meeting of OPEC members in Oman squelched rumors that the deal might be terminated, returning relative stability to the market. But Saudi Arabia continues to rely on Russian support to maintain market equilibrium.
Before the U.S. shale revolution began a decade ago, Saudi Arabia’s production was the most important variable in determining global oil prices. The kingdom’s ability to produce and export however much crude oil it wanted not only allowed it to control oil prices but also to use oil to influence geopolitics.
History is full of examples of Saudi intervention in the oil market. While the Saudi-led OPEC oil embargo of 1973 is the example that comes to most people’s minds, the Saudis’ production cut during the financial crisis of 2008 sparked a price rebound within six months.
Although the kingdom continues to be one of the world’s largest producers and exporters, it cannot single-handedly impact oil markets the way that it once did. A surge in U.S. shale production, slow growth in demand, and concern about a coming peak in demand have led to tectonic changes in oil market power dynamics.
According to the Energy Information Administration, United States crude oil production exceeded the 10 million b/d mark for the first time since 1970. Russia and Saudi Arabia are the only other two countries that could compete with U.S. production rates. With its declining influence over the oil market, Saudi Arabia has begun to diversify its economy away from oil. Now that a triumvirate reigns, the kingdom must factor in U.S. shale production, whether Russia wants a volume-cut deal to continue, and other geopolitical factors when it seeks a formula for maintaining market stabilization.
While free-market principles dictate the U.S. shale industry’s behavior, Saudi Arabia is dependent on Russian leaders’ oil policy determinations to achieve stabilization. In the meantime, it continues to lose market share to other producers — mainly Russia — because it agreed to larger cuts than any other participant in the current agreement.
No one knows how long Saudi Arabia will continue supporting a volume-cut deal. What is obvious is that the onetime swing producer — the country that could once single-handedly affect prices — has now become a swayed producer, or one that can impact prices but not all by itself.
The United States must ensure that Russia doesn’t outmaneuver it to increase its influence over global energy policy, and thus prices. This means the United States must keep a close eye on relations between its most important allies in the Gulf and its rival Russia. Gulf countries, especially Saudi Arabia, continue to be among the world’s biggest oil exporters. And American oil companies are still major oil and gas producers in the region.
The United States needs to keep lines of communication open with the Saudis and other Middle Eastern oil producers to address security challenges in the region and to maintain its influence in the wider world.
Rauf Mammadov is resident scholar on energy policy at The Middle East Institute, focusing on issues of energy security and global energy industry trends.