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Saudi Russian Oil Cooperation Steps Up Its Power Game

Insight & News
March 11, 2018
The global oil market has gone through several dramatic changes the last years. The success of the US shale strategy, combined with a financial crisis and a global glut of oil and petroleum product storage volumes, has pushed international oil power politics to form different alliances. OPEC’s main oil producer Saudi Arabia, which has been for decades the dominant force in oil, has had to reassess its oil market strategy dramatically, resulting in the widely analyzed OPEC and non-OPEC production cut agreement. The perceived weaker hand of the Kingdom, due to US shale oil volumes and exports, and the need for cooperation with former opponent Russia, is currently on the table.

To regulate or manage the international oil market is a totally different game at present. At the same time, the change in energy markets, and especially oil and gas, have also reshaped the geopolitical equation. While Saudi Arabia is a major energy producer, it must compensate for its lost revenue to support its ongoing economic diversification. At the same time, the US, China, Indian and Russia are all circling in hopes of gaining a financial advantage and taking part of the pie.

The coming months main focus of analysts should be on the growing cooperation between Moscow and Riyadh, even that both are opposing parties in the Syria conflict. The widely published multibillion bilateral investment deals is a sign of growing political cooperation, possibly reshaping not only the Middle East power constellation but also threatening US and Western positions. Saudi Arabia also has stepped up its efforts to lock in Asian crude oil and petrochemical demand by investing heavily in China, and since the last months also India. Beijing has understood that it can push Saudi Arabia not only to supply it with increased volumes of crude oil but also force it to invest in China’s growing petrochemical and refinery industries. The blooming Sino-Saudi relationship could be a threat to Washington’s relationship with Riyadh also. The Trump Administration, known for its blunt and sometimes erratic international behavior, has until now taken the position to overlook those flirtations in the hope that Saudi Arabia will continue to be a strategic bulwark against Iran. The latter is still the case, but only if Riyadh’s main power broker Crown Prince Mohammed bin Salman (MBS) sees this to fit in his own strategic future. The future of Saudi Arabia is not anymore directly linked to American support, but now has been linked to a chess play between Washington (West), Russia and China. For the new Saudi grand master MBS, the overlapping strategic interests of all three fit perfectly into his own strategy. MBS is looking to increase international support and opportunities to reap the rewards of his Saudi Vision 2030, which entails at present to diversify its oil-dependent economy, trim large budget deficits and secure the future of both the kingdom’s welfare state and its monarchy.

At the same time, Saudi oil politics are linked to the eagerly awaited Aramco IPO this year. The latter, expected to generate directly and indirectly hundreds of billions of US dollars, is also changing the geopolitical game in the region. The current discussion between Saudi Minister of Energy Khalid al Falih and his Russian counterpart Novak with regards to a possible Aramco investment in Arctic LNG2 is to be seen as part of it. Russian president Putin is smiling in the background, as the Saudi Russian overture is a direct slap in the face of Washington, as Riyadh is still seen as a major US ally. MBS and Falih however understand that part of a successful Aramco IPO will be based on Russian (and Chinese) investment funds. The current discussion, officially only on Arctic LNG2 or Russian Direct Investment Fund operations, are directly linked to the IPO. At the same time, Saudi Arabia is in dire need for natural gas to counter its growing domestic energy needs. Moscow and Riyadh have found each other now on the geopolitical chess game, changing the total constellation in the region while pushing up at the same time oil prices. It is a win-win game, where US shale or Washington’s military support for anti-Iranian actions have taken the backseat.

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