Once ardent Cold War adversaries, Russia and Saudi Arabia joined forces in November to push through an historic cut in crude oil production, an impressive feat of diplomacy involving 13 OPEC and 11 non-OPEC countries that took place outside the usual multilateral forums. Even more impressive is that the agreement overcame stark geopolitical divisions among the signing parties. The ceremony brought together many of the proxy combatants supplying opposing sides in the Syrian civil war: Russia and Iran, both backers of the Shia-oriented Syrian government and its allies; and Saudi Arabia and the Gulf monarchies, which mainly support Sunni rebel groups. How did it come about? Simple economic self-interest is the straightforward answer, but dismissing the achievement as a mere financial move would underplay its significance.
An agreement between adversaries: a landmark in the history of energy
The main players in the #OPECdeal agreed to split the burden on 1.8 million barrles a day cuts to #production
Constraining global oil supply has always been a knotty collective action problem. But collective action has only grown more complex since the days when a smaller OPEC cartel, the Texas Railroad Commission, or even Standard Oil could clamp down on producers to maintain ''reasonable'' oil prices. The November agreement assembled no fewer than two dozen states, many of them strategic competitors and even arch-rivals. The players agreed to trust each other long enough to share the pain of as much as 1.8 Mb/d in production cuts in return for the prospect of disproportionate gains in revenue. The sprawling deal of historic magnitude simply would not have materialized without major efforts by the two largest players, Saudi Arabia and Russia, to find common ground and to bring others along. Now the question is: Was Russia’s cooperation with the oil cartel an ad hoc opportunistic venture, or is the Russian-Saudi nexus something more permanent? On the one hand, the success of the November deal, brought together by two countries that find themselves increasingly at odds with Washington, signals enhanced willingness for Russian-OPEC cooperation. The deal also provides an unprecedented opportunity for Russia to build ties with Saudi Arabia, one of its most vehement Cold War foes. On the other, Russia’s commitment to fighting alongside sectarian Shia forces in Syria, including Iran and Lebanon’s Hezbollah militia, implies opposing geopolitical orientations that would weigh against closer alignment. The November agreement came together in the way that political compromises typically play out, with leaders twisting arms and offering sweeteners to build coalitions. Saudi Arabia, OPEC’s de-facto leader by virtue of its spare production capacity, took care of its corner. The kingdom secured the agreement of the Gulf monarchies and the other Arab members of the cartel along with others, like Oman, Sudan and Bahrain, which produce oil outside of OPEC. Russia’s cooperation starts with President Vladimir Putin, who saw obvious merits for his country. For the price of a gradual 300,000 b/d cut, about 2.6 percent of its peak 2016 output by the time the cuts reach their full extent, Russia has already begun reaping the benefit of a 20 percent increase in Urals crude sale prices. For Moscow, the November agreement has already proven its financial benefits. By contrast, the Saudis agreed to cut 486,000 b/d, and by January the kingdom announced that it had already surpassed that level. Other big cuts were promised by the United Arab Emirates - 139,000 b/d, and Kuwait, which promised to trim 131,000 b/d and surpassed that level in January. Russia also saw a unique opportunity to leverage its geopolitical advantage in the Gulf, the strategic heartland of U.S. energy security. In fact, the Persian Gulf monarchies are so important to Washington that protecting their sovereignty gave rise to the 1980 Carter Doctrine. The doctrine, which says the U.S. will use force if necessary to protect its interests in the Persian Gulf, was actually promulgated in a reaction to a Russian threat, the Soviet invasion of Afghanistan in 1979. The Carter Doctrine was enforced in 1991, when a US-led multinational force famously pushed the invading Iraqis out of Kuwait. Now, America, flush with shale oil and tiring of various unsuccessful attempts at reshaping the Middle East, seems to be taking a relaxed attitude toward Russian inroads in the Gulf.
Now the question is: Was Russia's cooperation with the oil cartel an ad hoc opportunistic venture, or is the Russian-Saudi nexus something more permanent? On the one hand, the success of the November deal, brought together by two countries that find themselves increasingly at odds with Washington, signals enhanced willingness for Russian-OPEC cooperation.
Moscow acts quickly to secure the deal
Unsurprisingly, Putin seized the initiative. He and Russian Energy Minister Aleksandr Novak were among those working hardest to secure the deal, demonstrating Russia’s credibility to cut production, while bringing on board a recalcitrant Iran and former Soviet producers Azerbaijan and Kazakhstan. This time around, Russia’s stance was more credible than promises it made in 1998, the last time Russia joined an OPEC cut. In those days, much of the Russian oil sector remained in private hands, and the botched post-Soviet privatization handed the keys to the economy to a handful of oligarchs who had little interest in promoting strategic interests of the state. Thus, cheating on Russia’s quota was rampant. Since Putin’s gradual re-nationalization of the biggest oil and gas companies, and his installation of key political subordinates at the head of those firms, the president’s promises of production cuts carry more weight. Enforcement of quotas is also eased by state ownership of Transneft, the monopoly owner-operator of Russian oil pipelines. Novak and his Saudi counterpart Khalid al-Falih are said to have hammered out the core principles of the November agreement during meetings that took place over a year, often meeting in secret. After the cuts, both ministers made statements suggesting that cooperation would continue. Novak went as far as to describe the close working relationship on energy as the first signs of an emerging ''strategic partnership''. ''It is an historic moment, in my view'', Novak said. Surprisingly, al-Falih echoed the sentiment, arguing that the deal ''cements and prepares us for long-term cooperation''. In January, al-Falih again called for a long-lasting partnership with Moscow, but was careful to frame cooperation in OPEC-Russian terms, rather than Saudi-Russian terms. “We at OPEC aim to optimize our relationship with Russia for the long term,” al-Falih was quoted as saying. ''A quick fix is not a big objective. We want this to be a lasting partnership. We have to be flexible when we intervene. Our partnership will evolve over time''. Such statements raise questions as to what the ultimate parameters of this partnership might look like. Putin’s participation allowed the deal to surmount the increasing animosity between the Saudis and Iran. Seven months earlier, Saudi-Iranian squabbling toppled the attempt to forge a similar agreement in Doha. At that time, Saudi Arabia had demanded that Iran make cutbacks, and Iran responded that it would only consider cutbacks once its production had reached 4 Mb /d, the level it held prior to the imposition of international sanctions on its nuclear program. Those sanctions were lifted in 2016. This time around, Putin brought Iran on board by first ascertaining that Saudi Arabia would indeed agree to bear the largest production cuts of any participant. However, the Saudis did not want to be seen as conceding too much to Iran. Learning this, Putin is said to have phoned Iranian President Rouhani, with whom he has a cordial relationship, and quickly secured his agreement. Iran would play along, without being asked to make any cuts, and would refrain from gloating that it had won a ''victory over the Saudis''. The surprising result: Saudis wind up cutting more than 500,000 b/d. Iran, by contrast, was permitted a 90,000 b/d increase in production.
The balance of power between OPEC and non-OPEC producers
As the old animosity between Russia and the Gulf producers appears to ease, one has to wonder about the balance of power between OPEC and non-OPEC producers. In the long run, the twin pressures of climate change and huge resource discoveries outside of OPEC bode ill for the cartel’s market power. However, heightened cooperation, particularly with Russia, may erode Washington’s influence on the Saudis, and by extension over the oil market itself. A decade or two ago, this would have been unthinkable. During Soviet times, Saudi Arabia and the United States were joined in a strategic partnership that moved in virtual lock-step. At every opportunity, the Saudis backed U.S. efforts to combat Soviet and communist inroads around the world, including in Egypt, the Congo, Angola, Nicaragua, and most successfully, Afghanistan. At the same time, Saudi Arabia used its spare oil production capacity to bolster various U.S. interventions in the Middle East. Whether it was the loss of Kuwaiti production in 1990, the civil war-driven outages in Libya since 2011, or the nuclear-driven sanctions on Iran, America worked in concert with the Saudis to ensure that disruptions in oil supply could be covered without imposing undue pain on importing states, and in particular on the American motorist. In return, the United States provided hard security protection to the otherwise weak Gulf monarchies. The old oil-for-security deal always featured an unspoken tenet: Russia would be kept at arm’s length. In 1951, Saudi King Abdul Aziz famously told a U.S. general who commanded the U.S. airbase at Dhahran: ''If you can find a communist in Saudi Arabia, I will hand you his head''. Nowadays there are plenty of Russians in the Gulf, although few of them can be described as communists. Gulf resorts, particularly Dubai, have long attracted big-spending Russian tourists. The Burj al-Arab, with rooms at USD 1500 per night, is so popular with Russians that the hotel hires Russian speaking staff. The traffic goes both ways. In December, OPEC essentially bought a share of Russian oil production, albeit one that remains under control of the Russian state. The Qatar Investment Authority teamed with Swiss commodity trader Glencore in a USD 11 billion agreement to buy a 19.5 percent stake in Rosneft, one of the world’s largest publicly traded oil firms. The Russian government retains a majority stake. If the deal concludes, the Rosneft sale would be one of the biggest energy transactions in recent months, representing a blatant end-run around Western sanctions on Russia. The deal is notable in part because Qatar, a U.S. allied sheikhdom, apparently felt comfortable investing in Russia despite hosting the forward headquarters of the U.S. Central Command at the sprawling al-Udeid Airbase outside Doha.
Deterioration in U.S.-Saudi ties accelerated under President Obama, who openly disdained the relationship, even more alarming for Riyadh was U.S. participation in the 2015 agreement in which Iran froze nuclear development in return for the lifting of Western sanctions. The nuclear agreement cleared the way for Iran's re-emergence into oil markets, and more importantly, as a strategic competitor with Sunni regimes across the Gulf.
The "understandable" position of the United States
Meanwhile, the United States appears to be enabling Russia’s inroads by stepping away from the Middle East and gradually downgrading its ties with Saudi Arabia. America’s stance is partly excusable. The U.S. - Saudi relationship lost much of its strategic rationale after the 1991 breakup of the Soviet Union. Since then, America has been buffeted by involvement in costly and unsuccessful wars which have done nothing to stanch the chaos in Syria, Libya, Yemen and Iraq. Deterioration in U.S.-Saudi ties accelerated under President Obama, who openly disdained the relationship. Obama withdrew U.S. forces from the region and sympathized openly with Arab Spring protesters in Egypt and Tunisia. The pro-revolt stance alarmed Saudi Arabia, especially the withdrawal of U.S. support for longtime Egyptian President Hosni Mubarak, deposed in 2011. The Saudis also decried Obama’s unwillingness to forcefully intervene in the Syrian civil war. Most alarming for Riyadh was U.S. participation in the 2015 agreement in which Iran froze nuclear development in return for the lifting of Western sanctions. The nuclear agreement cleared the way for Iran’s re-emergence into oil markets, and more importantly, as a strategic competitor with Sunni regimes across the Gulf. Former Saudi ambassador to Washington, Prince Bandar bin Sultan, predicted that the nuclear deal would ''wreak havoc in the Middle East'' because it aids Iran, ''a major player in the destabilization of the region''. OPEC has also been drawn to Russia and other non-OPEC states because two of the biggest oil producers, America and Canada, lack the wherewithal to control oil production within their own borders. Washington and Ottawa have almost zero state influence on production decisions of more than 10,000 private operators in their oil sectors. The shale revolution allowed America to attain self-sufficiency in natural gas and move closer to self-sufficiency in oil. While Saudi Arabia remains the No. 2 supplier of U.S. oil imports, it is losing market share to Canada. If the Keystone XL pipeline is built, it could lose a further share of the strategic U.S. market. With Donald Trump in the White House, it is anybody’s guess whether the U.S.-Saudi relationship prospers or falters further. On the one hand, Trump campaigned on further reductions in American commitment to the region and made disparaging comments about Saudi Arabia, arguing that U.S. imports of Saudi oil—and perhaps U.S. military support—would be predicated on Saudi action in the fight against the Islamic State, or ISIS. On the other hand, Trump’s appointment of former Exxon Mobil C.E.O. Rex Tillerson as secretary of state suggests the possibility of strengthened ties not only with Russia, but also with Saudi Arabia and other oil-producing countries with whose leadership Tillerson is on good terms. Changes in the U.S.-Saudi-Russia dynamic will unfold over the long term, held back by structural hurdles. Russia’s wherewithal to penetrate the U.S. -allied Gulf, with its U.S. bases and national militaries that remain interoperable with America’s, remains limited. At the moment, Russia’s backing for Shia rivals to the Sunni monarchies also stands in the way of further inroads. At the end of the day, when there is trouble in the Middle East, it is still Washington that gets the call.