Home » Russia and Saudi Arabia’s Oil Partnership Shows Strain
Economy News Russia Saudi Arabia

Russia and Saudi Arabia’s Oil Partnership Shows Strain

For most of the last six years, the leaders of Russia and Saudi Arabia worked with each other to control the global oil market during times of war, pandemic and dizzying price gyrations.

But their alliance appears to be straining in ways that could help the Biden administration, which was eager to head off another significant jump in energy prices just ahead of Secretary of State Antony J. Blinken’s visit to Saudi Arabia this week.

At last weekend’s meeting of OPEC Plus, the oil cartel that the two countries lead, Saudi Arabia and Russia quietly parted ways. Saudi Arabia said it would reduce its exports by a million barrels of oil per day in an effort to prop up falling prices. But Russia made no new commitment to reduce its exports.

It was the second time the partners diverged recently on oil policy. Just two months earlier, Russia and Saudi Arabia, which together sell more than 20 percent of the oil used by the world, had agreed to cut production. But while Saudi Arabia followed through and sold less oil to other countries, Russia does not appear to have done so. Russia recently stopped disclosing information on its oil industry, but analysts estimate that Moscow has increased exports, undercutting that earlier deal.

The Saudi-Russian oil alliance has always been about a shared goal of propping up oil prices and maximizing export revenue. But Russia’s war in Ukraine has changed the dynamics of the relationship. Russia is increasingly willing to accept lower prices in order to sell more oil, much of it going to China and India, because it needs the money to fund its war effort.

Russia’s pressing needs — along with weak global demand for oil — have helped drive prices lower. That has helped bring down energy prices around the world, including in the United States, where President Biden made reducing gasoline prices a central policy goal after the war in Ukraine began last year.

On Wednesday afternoon, the U.S. benchmark oil price was less than $73 a barrel, about what it was before the weekend OPEC Plus meeting and down from $120 last summer.

“The goals of Russia and the cartel are diverging,” said Mikhail Krutikhin, a veteran Russian oil expert now based in Oslo. “There is no trust in Russia’s data, and there is no trust in Russia’s actions.”

Saudi officials have not publicly criticized Moscow, appearing to help President Vladimir V. Putin out of a corner in an effort to preserve a partnership that started in 2016 and has been generally profitable to both sides.

Bruce Riedel, a former Middle East analyst at the Central Intelligence Agency, disagreed with the idea that the Saudi-Russian relations were strained. He said that by unilaterally cutting oil production, Saudi Arabia was distancing itself from the United States, and specifically the Biden administration.

“The Saudis have tilted decisively toward Russia by cutting oil production to raise prices,” said Mr. Riedel, now at the Brookings Institution. “The timing, on the eve of Blinken’s visit, added to the message.”

Even if the Saudi move to reduce production and increase global prices is troublesome for Washington, Riyadh seems to be hedging its bets between its longstanding ally, the United States, and Russia, its newer partner on oil policy.

The Saudis and the United States both have reasons to stabilize their relationship, said Robert Jordan, a former U.S. ambassador to Saudi Arabia.

“The Saudis want U.S. fighter aircraft, nuclear technology and security guarantees,” Mr. Jordan said. “The U.S. wants them to recognize Israel and keep oil production flowing.”

The relationship with Saudi Arabia has helped Russia during its grueling war with Ukraine. While Western countries began withdrawing investments from Russia last year, Saudi Arabia’s Kingdom Holding Company invested hundreds of millions of dollars in Russian energy companies. Then Saudi Arabia ramped up imports of Russian fuel oil for its power plants while other countries restricted or ended purchases of Russian energy.

An oil tanker in the water, in the background. An industrial facility is in the foreground.
An oil tanker near the Russian port city of Nakhodka. Russia has been unwilling to cut its export sales because it needs every ruble to conduct its war in Ukraine.Credit…Tatiana Meel/Reuters

In September, the two countries guided OPEC Plus to reduce oil output, to the dismay of the Biden administration. The move was seen as a rebuke to Mr. Biden, who had traveled to Saudi Arabia in July and exchanged a fist bump with Crown Prince Mohammed bin Salman — after criticizing him during his presidential campaign. The president, who was being chastised by Republicans for soaring inflation, was hoping the Saudis would increase oil production or at least not cut it.

But the Russian-Saudi oil partnership has frequently been unsteady. In 2020, as the Covid pandemic undercut the global economy and oil prices, Russia refused to cooperate with Saudi officials to make deep production cuts to stabilize prices. In response, Saudi Arabia flooded the market with oil, crashing the crude price and badly damaging Russian oil companies.

In a recent TV interview, Prince Abdulaziz bin Salman, the Saudi energy minister and Prince Mohammed’s half brother, recalled the brief split in grand terms. “It wasn’t a matter of pricing, profit or income,” he said. “It was a matter of ‘to be or not to be’: Who rules this sector?”

Still, the alliance persevered, and energy analysts predict it will continue even as various OPEC Plus members show increasing independence.

“I see emerging tension, but it’s still an alliance as they still need each other,” said Bill Richardson, a former U.S. energy secretary and ambassador to the United Nations.

While the producer group extended collective supply cuts, the United Arab Emirates was allowed to raise its production quota for next year. In the final tally, oil analysts say, the latest OPEC Plus decision could reduce global oil supplies by a modest one million barrels a day for at least one month out of a global market just above 100 million barrels a day.

The two countries still have much in common, including how they view some U.S. policies. When the United States and European countries imposed a price cap on Russian oil exports last year, Saudi Arabia and other Middle Eastern energy-producing states viewed the action as a potential threat, a policy that could be used to clip their profits in the future.

“It would make no sense for either country to walk away from this pivotal alliance at a time when energy security is at risk across the world, and oil and gas markets are in turmoil,” said Sadad Ibrahim Al Husseini, a former senior executive at Saudi Arabia’s national oil company, Aramco.

In the first five months of this year, Russia’s oil and gas revenues, the largest contributor to its budget, were half as much as they were in the same period in 2022, according to the country’s finance ministry.

Ariel Ahram, a Middle East expert at Virginia Tech, said the Middle Eastern producers had been hoping that demand from China would increase as it emerged from its Covid lockdowns, but they have been disappointed. As oil prices have tumbled below what they were when Russia invaded Ukraine, Saudi Arabia and its allies have to keep Russia in the fold.

“Tilting toward Russia is a way to bide time,” Mr. Ahram said.

But some Middle Eastern officials are already complaining about Russia’s reliability as a partner. One point of contention is that Russia has not disclosed its energy production data since April. Many analysts have said it appears that Russian seaborne oil exports have been increasing, which has compensated for the loss of oil sold to Europe by pipeline.

“To be effective, the alliance must publish its data,” said Marcel Salikhov, director of the Institute of Energy and Finances in Moscow. “Russia has closed its data, and this creates contradictions.”

Source : TheNewYorkTimes