There Appears to Be a Truce After Years of Hostilities Between the World's Great Oil Producers
In Doha, Qatar’s capital, the energy ministers of Qatar, Russia, Saudi Arabia and Venezuela huddled behind closed doors at the St. Regis Hotel. These four countries account for about a third of the world oil output. The combined oil output from Russia and Saudi Arabia delivers about 13 percent of the world’s oil, each pumping close to 11 million barrels of oil per day.
A long oil war—mostly prosecuted by Saudi Arabia—had greatly damaged Russia and Venezuela, bringing Saudi Arabia as well to the point of self-destruction. These powers needed a deal to end the Oil Civil War of 2014-'16. The energy ministers stepped into the sunshine hours into their conversation. A deal had been reached.
Why did the price of oil—Brent Sea Crude—plummet from over $100 to under $30? The Organization of Petroleum Exporting Countries (OPEC), which controls 40 percent of the world oil market, met on Nov. 27, 2014. The members came to stem the decline. Major OPEC countries—Nigeria, Iran, Iraq, Saudi Arabia and Venezuela—relied upon their oil revenues. Declines in prices hit their economy hard. If the OPEC states curbed their production, this decline in supply would push prices upward. This is what many of the 13 OPEC states desired. Saudi Arabia, despite suffering the burdens of low oil prices, refused the suggestion. OPEC did not act.
Turmoil in Iraq and Libya, both OPEC members, had cut oil supplies. This should have raised the price of oil, not seen it decline. The United States had emerged, surprisingly, as the world’s major oil producer, although this was largely for domestic consumption. China and India have increased their demand for energy supplies. These countries easily make up for the decline of imports into the United States. Increased U.S. production should not have impacted the price of oil so dramatically. So what did it?
Commerce took a back seat to politics in 2014. Saudi Arabia decided to pump as much oil as it could so as to reduce its price. Lowered energy prices greatly weakened its adversary Iran, and threatened the stability of two of the main global adversaries of the United States: Russia and Venezuela.
Pressure by the West against Russia on its borders provoked the incident in Ukraine, while Russia involved itself in Syria against Western interests. Close political and military coordination between China and Russia challenged the Western understanding of the world order. A new Cold War had begun. Western sanctions against Russia over the Ukraine crisis had limited impact on the Russian economy. But the drop in oil prices put severe pressure on the government’s revenues. Russia began to sell off foreign currency holdings, hoping to make up for the fall in oil profits. What protected President Vladimir Putin is that Russia is an aging society, with the elderly leaving the workforce and fewer new entrants competing for their jobs. Unemployment, which could be a major political problem, remains at moderate levels.
Venezuela, meanwhile, had, since the failed coup against the Chavez government in 2002, moved South America away from U.S. hegemony. New institutions such as the Bolivarian Alliance for the Peoples of the Americas and the Community of Latin American and Caribbean States as well as the introduction of a virtual currency—the sucre—indicated that South America had embarked on an experiment outside the tentacles of Western banks and political institutions. Low oil prices hurt the Venezuelan plans to increase the social capacity of the country and the region. Grave threats to the social welfare sector and to employment created political shock waves in Venezuela, resulting, no doubt, in the ruling party’s loss in the parliamentary elections of 2015.
No question that the adversaries of the West suffered from the decline in oil prices.
Saudi Arabia had its pumps running on overtime, which harmed Russia and Venezuela, but which also did great damage to the Saudi exchequer. Over 90 percent of Saudi Arabia’s budget relies on oil profits. It is this money that allows the country to control the vast royal family and to buy the loyalty of its population.
Decline in oil revenues has forced Saudi Arabia to dip into its reserve funds to extract the payout to its population. There is now talk in Saudi Arabia of organizing an initial public offering in Saudi Arabia’s oil firm, ARAMCO, and—god forbid—levying taxes on Saudi subjects. These are some of the strategies to raise revenues. If these are not sufficient, Saudi Arabia has been considering cutting its expenditure; for instance, to cut energy subsidies and to cut the rent checks to its expansive royal family. Raising taxes and cutting subsidies—namely austerity—will not go down well in the Kingdom. Signs of discontent already exist. King Salman is not deaf to the threats from below.
S&P downgraded the Kingdom on February 18 from A+ to A-. This is a poke in the eye of the Kingdom. Recently re-elected IMF chief Christine Lagarde hastened to the Gulf, where she spoke at the IMF’s Arab Fiscal Forum. Her speech carries several heresies: that oil prices would remain low and that the only way to raise higher revenues is to tax the population. None of this was pleasant to the sheikhs. The IMF indicated that despite their bad financial situation, and the improbability of austerity policies, the Fund would guarantee bank loans for the cash-strapped Kingdom. Under Lagarde and her predecessor (Dominique Strauss-Kahn), the IMF has changed its rule to lend to countries that have not honored their creditors as long as these countries (Ukraine and Saudi Arabia) are Western allies.
Saudi Arabia is bleeding money in its two wars—against Yemen, and through its proxies, in Syria. As part of its Syria campaign, Saudi Arabia provided Lebanon with $3 billion in security aid. It hastily cut that pledge. Drawdown of the war in Yemen is impossible because King Salman’s son Mohammed Bin Salman, the Defense Minister, has staked his prestige on this quagmire (Saudi Arabia’s war began in March of last year). Withdrawing from Syria is not as much a choice as a foregone conclusion. The Russian entry into Syria has squeezed the Saudi proxies, which are now in disarray. Saudi Arabia’s threat to invade Syria has had to be withdrawn. It does not have either the ground forces or the finances to prosecute a war at that scale. When it became clear that the U.S. would not join in the adventure, the Saudis made it clear that they were not going to escalate the conflict. The endless bombardment of Yemen is sufficient.
Saudi Oil Minister Ali al-Naimi said of the Doha meeting that it was the prelude to “other steps.” It is fitting that Qatar played host to a meeting that brought Saudi Arabia to a room with Russia and Venezuela. The details of the truce had to be worked out by these adversaries. They agreed to freeze production levels. This was the first step toward ending this pyrrhic war.
The four states agreed that countries like Iraq and Iran, damaged by war and sanctions, would be allowed to pump over their mark if and when a wider deal is reached. This is significant because it means that Saudi Arabia is willing to let Iran benefit from its oil production. Perhaps here is an indicator that Saudi Arabia has begun to come to terms with certain new realities: the importance of Russia in the region and the impossibility of engaging Iran.
Iran’s oil minister, Bijan Namdar Zangeneh, said his country would welcome this cooperation. Iran, he said, “was happy to take every action to stabilize the market and help support prices.” Meanwhile, Iran’s minister to OPEC, Mehdi Asali, called the agreement “ridiculous.” This is not divergence of personnel. It is the range of views in Iran over this deal. Would Russia, which is not known for fidelity in these matters and is not a member of OPEC, hold fast to the agreement? Would Saudi Arabia, whose animosity against Iran remains red hot, betray the Iranians? Will OPEC be able to take the measure of this deal and enforce it on a much broader level?
OPEC’s Secretary General Abdallah Salem el-Badri, a Qaddafi-era minister of oil in Libya, said his members will “feel the water” of the new deal. OPEC meets in Vienna this June. By then the outcome of the cessation of hostilities between Saudi Arabia and Russia/Venezuela will be clear, as will tenor of the relationship between Saudi Arabia and Iran. Perhaps by June, peace will be on the horizon. El-Badri will shuttle between Tehran and Riyadh, testing the waters, building trust, doing what this man who has spent his career among mercurical and difficult people does best.