by Jonathan Ariel
Oil relationships are as unstable and volatile as romantic ones.
Muhammad bin Salman and Vladimir Putin, photo via Wikipedia
BESA Center Perspectives Paper No. 1,552, May 6, 2019
EXECUTIVE SUMMARY: Oil
relationships are as unstable and volatile as romantic ones. Following a
deadlocked OPEC summit in February, Moscow and Riyadh announced they
would ramp up production, sending already low prices tumbling. Since
both countries’ budgets are almost entirely dependent on energy exports,
this suggests they have decided geopolitical interests trump purely
economic ones.
On February 6, 2020, OPEC held a meeting
in Vienna to try and reach agreement on oil prices and production
levels. The meeting ended without agreement following Russia’s refusal
to slash production, even if this meant a further drop in prices already
depressed by the beginning of the coronavirus crisis. Russia’s
obstinacy was curious, as energy exports make up the lion’s share of its
budget. But given Putin’s adventurist foreign policy, which includes
costly military interventions in Syria and Ukraine and extensive
cyberwarfare operations against the US and other major western political
systems, as well as growing discontent within Russia over the
deteriorating standard of living, he felt he could not afford to lower
production levels, even if that meant no increase in prices that were
already relatively low.
A few days after the meeting, Saudi Arabia
detonated an even bigger bombshell when it announced that it would not
only increase production but would reduce prices via discounts. The
result was a decrease of $24 per barrel in a single day (March 9, 2020),
the biggest single day oil price plummet in almost three decades. This
dropped prices to around the $30/barrel mark.
On the surface, this made as little sense as the
Russian refusal to slash production. Riyadh is involved in a costly
proxy war with Iran in Yemen, and its budget is even more oil dependent
than that of Russia. It is already running an unprecedentedly large deficit,
and despite foreign currency reserves of approximately half a trillion
dollars, it cannot cushion its economy indefinitely from the impact of
such low prices.
Why would two major producers so dependent on oil exports act in a way seemingly so detrimental to their own economic interests?
Regarding Russia’s motives, the answer seems
obvious. The main casualty of prolonged low oil prices would be the US
energy industry. For decades, the US was highly dependent on energy
imports, as anyone knows who remembers the fuel crises generated by the
post-1973 War Arab oil boycott. This has changed over the past two
decades as new fracking technologies have enabled US energy producers to
exploit the country’s vast shale oil reserves. Thanks to fracking, the
US achieved energy independence by 2016, and last year began exporting
significant amounts of crude and refined petroleum products.
Fracking is more expensive than drilling, however.
At $30/barrel, most oil drilling operations may not be lucrative, but
they remain viable.
Fracking, by contrast, begins losing its economic viability at around
the $50/barrel mark. For Saudi Arabia and Russia, prices hovering over
the $30 mark are the economic equivalent of a bad cold. For the US
energy industry, such prices are a terminal disease that will cause the
fracking industry to implode.
Because Russia has, over the past decade, made no
secret of the fact that it regards itself as adversarial to the US, it
is no surprise that it is willing to inflict economic pain on itself if
doing so would inflict greater pain on the US. Putin’s strategy has been
to obliquely confront the US, primarily by subverting its political
system via an ongoing sophisticated and effective cyber-disinformation
campaign. One of his biggest frustrations has been his inability to
inflict any kind of economic damage on the US. He appears to have found a
way to do this, and is willing to absorb the pain that goes with the
gain.
Yet this is not the whole story. Unleashing
economic mayhem on the US energy industry could significantly boost
Putin’s efforts to further destabilize and paralyze the already
dysfunctional American political system. As this is an election year, he
could create a near perfect storm of eco-political disruption,
given that the majority of states that would bear the brunt of a
fracking implosion are either in the American rural heartland (Oklahoma,
Kansas, Nebraska, North Dakota, Montana, Wyoming) or the South
(Mississippi, Arkansas, Alabama, Louisiana). Even more ominously,
several Midwestern swing states that are likely to be election deciders,
such as Ohio, Michigan, and Pennsylvania (much of which is culturally
if not geographically Midwestern), are also key fracking centers, and
their economies are highly dependent on the industry.
These states share a few important common
denominators. They all voted for Donald Trump in 2016, and they are all
poorer, more conservative, and less diverse than America as a whole. For
most of them, fracking is one of relatively few significant employment
generators. If fracking goes south, they will see unemployment spike,
which could significantly impact the election, especially in the key
states of Ohio, Michigan, and Pennsylvania.
An attack on the American fracking industry also
has the potential to inflict significant geopolitical damage. Without
fracking, the US instantly goes from being an oil exporter to a major importer. Moscow has already succeeded in exploiting the EU’s dependence on Russian gas
to its geopolitical advantage. Putin no doubt remembers how the Arab
oil boycott affected the US in the 1970s. Returning the US to a
dependency on foreign oil would give Putin unprecedented leverage over
Washington.
The bottom line is that if this ploy works, Moscow
could hit Washington with a triple whammy: it could further compromise
the American political system, reduce the US’s economic clout and
ability to project soft power, and curtail its ability to counter
Russian aggression.
The more interesting and, for Israel, possibly
ominous question is why Saudi Arabia would cooperate in such a damaging
assault on the US. After all, the kingdom has always been totally
dependent on the US to ensure its survival.
One possible answer is that Crown Prince and de
facto ruler Prince Muhammad bin Salman (MBS) has come to the conclusion
that the kingdom can no longer rely on the US and needs to recalibrate
its strategy and policy. There is some logic to this thinking. Trump has
proven that while he talks loudly and boasts about the American big
stick, he is extremely hesitant to use it. His record since taking
office shows a pattern of withdrawal, especially regarding the Middle
East. He abandoned the Kurds and weakened Saudi deterrence when he
declined to retaliate after Iran launched a damaging cruise missile
attack on Saudi oilfields, considered a strategic target.
Even worse, this is not a short term development.
The Republican Party, which has tended since the 1950s to be more
hawkish than the Democrats, has undergone a metamorphosis under Trump.
It has adopted all his policies, which are largely populist and
neo-isolationist. Economically, it has abandoned its commitment to
fiscal prudence and reasonably balanced budgets. Regarding foreign
policy, there is scant difference between “Make America Great Again” and
“America First.” There is little reason to assume that a second Trump
administration would jettison its neo-isolationism and adopt the type of
proactive and hawkish foreign policy that has been a Republican
hallmark since the 1950s.
With that said: if a second Trump administration
is an unappealing prospect to MBS, the idea of a Democratic
administration is a nightmare.
Joe Biden was the Obama administration’s leading
foreign policy luminary. That administration’s foreign policy in
general, and in the Middle East in particular, was characterized by
timidity, appeasement, and a deep aversion to confrontation. On Obama’s
watch, Syria was abandoned to Iran, Russia, and al-Qaeda as well as its
more radical jihadi spin-offs. Iran was empowered while traditional
American Sunni allies got the cold shoulder.
A Biden administration would be even less likely
to intervene militarily on behalf of traditional US allies, given that
it has a not insignificant radical wing to deal with. Sanders, the
party’s elder statesman, is a tame hawk compared to many of his
supporters, especially the “Squad” (freshmen Representatives Ilhan Omar
of Minnesota, Alexandria Ocasio-Cortez of New York, Rashida Tlaib of
Michigan, and Ayanna Pressley of Massachusetts). These four have already
established a reputation as radical Young Turks who relish being
gadflies of the first order. If Obama was indifferent to Saudi Arabia,
the Squad is positively hostile to the Ibn Saud dynasty. Their instinct
is to oppose military intervention, especially to defend non-democratic
regimes. Regarding Saudi Arabia, they are more likely to support the use
of force to facilitate regime change in Riyadh than to maintain the
status quo.
MBS seems therefore to have embarked on a
high-risk game in which he hopes to achieve two aims. By coordinating
oil price policy with Russia, he hopes to get Moscow to take Riyadh’s
interests into account and include it in the game it is playing with
Iran and the Turkish-Qatari axis in Syria. He wants to see Iran’s
presence in Syria curbed, and knows that for now, only Russia can be of
any use to him in this regard. Low oil prices will affect Iran much more
than any other Middle Eastern country, forcing it to reduce its
military involvement in the region (Syria, Iraq, Yemen), and perhaps
even generating a regime-threatening economic crisis.
He also knows that the only way to ensure
continued American support is to have it once again dependent on Saudi
oil. Working with Russia to gut the American fracking industry is the
best way to achieve that.
MBS can play this game with a reasonable chance of
success because of the contradictory nature of Russia’s tactical
alliances with countries with more opposing interests than matching
ones. Turkey and Iran are historical enemies and each has a totally
different agenda, in that both aspire to be the prime regional power.
Turkey wants to lead a Muslim Brotherhood-inspired Sunni Islamist
revolution that would see it regain the status the Ottoman Empire had
over a century ago as leader of the Sunni world. Iran wants to take over
the entire Islamic world and make Shiite Islam, for the first time
since the split, the dominant force in that world.
Neither Putin’s balancing act between Ankara and
Tehran nor MBS’s between Russia and the US can last forever. But until
Putin decides to end it and make a strategic choice, Saudi Arabia can
continue to play the game.
Source: https://besacenter.org/perspectives-papers/russia-saudi-arabia-us-oil/
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