Opec-russia oil deal is only a tactical truce
New battles are inevitable, Sergey Sukhankin writes.
The “historic” oil deal between OPEC and Russia concluded on April 12 — de facto joined by the U.S., Mexico and Canada — is unlikely to yield lasting change. Various adverse circumstances have left all the parties involved dissatisfied, and the core issues that led to the crisis remain unresolved.
Three major events threw the global oil market off-balance: the outbreak of COVID-19 and its containment measures, the oil glut in the global energy market and the price war between Saudi Arabia and Russia. A complex tangle of geo-economic and geopolitical factors lies behind these events, but three factors are key.
First, there is the trilateral U.s.-russia-saudi conflict. Animosity among the parties has reached a critical level and the deal resolves nothing. Russia’s economy is still heavily dependent on oil revenues; thus, a drastic cut in oil production in the long run is unacceptable. Once the price of oil reaches $42 per barrel — the price at which Russia’s economy breaks even — and the global demand stabilizes (around 2022), Russia will revert to its habit of pumping oil in much greater quantities than agreed upon. Lukoil CEO Leonid Fedun described the deal as the Brest-litovsk Treaty. Russia’s oligarchs — including President Vladimir Putin’s crony and the head of Rosneft, Igor Sechin — view it as humiliating. Once oil markets stabilize, Russia will seek an opportunity to retaliate against the U.S. and, potentially, Saudi Arabia — Russia’s strategic competitor in the Chinese and even European markets.
Saudi Arabia, whose budget breaks even at $60 per barrel, is dissatisfied with both Russia and the U.S., and sees the deal as a temporary recess. Rifts between Riyadh and Washington stem from geopolitics (disagreements over Iraq, Syria, Iran and Egypt) and geo-economics, as the rise of U.S. shale oil has turned the two into competitors in the global oil market. The notion of oil security — sketched out in the 1945 deal between Franklin D. Roosevelt and Abdulaziz ibn Saud, and reinstated in
1979 by Jimmy Carter — seems to have lost its appeal for Saudi Arabia. The U.S. faces a serious dilemma: the deal threatens the U.S. oil industry, jeopardizing millions of jobs and the U.S.’S energy-independent status. Those millions of jobs are President Donald Trump’s trump card in the coming election. At the same time, Congress is unhappy with the Saudis’ hostile actions — Russia’s status as an adversary is obvious — and calls for a serious confrontation with Riyadh are becoming more audible.
The second factor is the agendas of other oil producers. For OPEC members with poorly diversified economies, such as Algeria, Venezuela, Iran, Iraq and Nigeria, protracted low oil prices create adverse economic and security consequences. An economically highly developed player such as Canada will adjust, albeit painfully, to this new reality. However, oil-dependent provinces such as Alberta will be hit particularly hard, resulting in growing dissatisfaction with the federal government and creating a risk of interprovincial instability. On top of all that, the mid- to long-term position of energy producers such as Kazakhstan, which might also produce more oil, remains unclear.
Third is the Chinese factor, along with the principle of survival of the fittest. The oil shock has vividly demonstrated the importance of the demand for Chinese oil in the global market. With slowing economic growth worldwide, and particularly in China, competition for market share among the U.S., Saudi Arabia, Russia and other oil producers will increase. China will assume the position of “a wise monkey sitting on top of the mountain.” This means that competition is about to get tougher and the potential for dirty tricks should not be discounted. Every crisis in the Middle East/persian Gulf — akin to the one that occurred in September 2019, when Saudi Arabian oil facilities in Buqayq and Khurais were attacked — could have a big impact on oil prices and on the balance of power in the oil markets. Some large energy buyers, including Japan, are seriously considering diversifying their oil and gas supplies away from the unstable Middle East.
While the global oil market recuperates from the shock caused by plummeting prices, all the major players will try to honour the OPEC++ agreement. Once prices rebound and some stability returns, it will just be a matter of time before a new clash occurs.