Resisting on oil gives political leverage to the Gulf

The Gulf states’ reluctance to pump more oil to help those too reliant on Russia is about more than a desire to strike out against the Biden administration.

Expert comment Updated 8 April 2022 Published 31 March 2022 3 minute READ

Despite overtures from world leaders, OPEC+ stuck with its current agreement on 31 March to increase production by just over 400kbd per month until August – given the only countries which are capable of lifting output by any significant amount at present are Saudi Arabia and the UAE, and they are definitely not going to budge. News that the White House is about to authorize the release of 180 million barrels from the Strategic Petroleum Reserve (SPR) will only harden minds.

The pair’s reluctance to pump more to help those countries still too dependent on Russian energy has been heavily scrutinized, and largely attributed to their dissatisfaction with the Biden administration in the US for not providing adequate security guarantees.

But although there may be truth to this analysis – and there is little doubt Crown Prince Mohammed bin Salman (MbS) and Crown Prince of Abu Dhabi Mohamed bin Zayed (MbZ) are frustrated with the US – several other pressing factors which are more rooted in energy fundamentals than geopolitics have led Saudi and Emirati leaders to keep to their OPEC+ commitments.

Neither the Saudis nor the Emiratis will make sudden movements which could undermine the stability of the group and risk sharpening the inclines and declines of oil price volatility

Although politics does play a greater role in decision-making now, both Saudi Arabia and the UAE are more inclined to act in their respective national interests than align with Western policy. And increasing oil production to support sanctions against Russia in a bid to soften oil prices does not serve their national interests – in fact, it could be damaging in several ways.

High prices are a reminder of a slow transition

Energy ministers in both countries are undoubtedly arguing that current high prices not only benefit national economies but also provide for critical upstream investment which has slowed on a global scale, in part leading to the current supply crunch. High prices support efforts to extend the lifespan of their hydrocarbon-based economies but also persuade leaders of OECD countries that the transition away from oil and gas cannot happen overnight.

The Russia-Ukraine crisis highlights the extent to which consuming countries still rely on hydrocarbons and will do for the foreseeable future, despite net-zero and climate-related pledges to develop alternative energy sources. The drive to divest from hydrocarbons has caused underinvestment across the industry, leading to an exposed energy market increasingly vulnerable to geopolitical shocks.

Continuing in this vein threatens not only economic stability, but also economic growth so, to combat this, both countries are channelling higher oil revenues into production expansion plans – now deemed more palatable after the realisation that energy transition – while critical for the well-being of the planet – will take time.

It has become clear that decision-makers cannot simply wish it to happen; investment in both hydrocarbons and renewables is needed which gives Saudi Arabia and the UAE political cover for investing heavily to monetize hydrocarbon resources now. And so current high prices, underpinned by international policies towards Russia, are good for business.

As ‘boom and bust’ is a natural feature of the oil market, there is a sizeable risk that high prices may reach a tipping point leading to demand destruction and triggering a global recession. Riyadh and Abu Dhabi are therefore treading a fine line, but clearly believe keeping OPEC+ aligned and on track – and with Moscow inside the tent – is the best way of managing the current crisis.

Saudi Arabia has reprised its role in leading the OPEC+ alliance after stepping aside in 2014 and then crashing the price in early 2020 to punish Russian profligacy. Despite Abu Dhabi making waves in 2021, Riyadh has corralled the OPEC+ members into keeping their commitments to the current agreement – and unilaterally increasing production would end Riyadh’s dominance and likely lead to yet another period of unfettered volatility.

The Russia-Ukraine crisis highlights the extent to which consuming countries still rely on hydrocarbons and will do for the foreseeable future, despite net-zero and climate-related pledges

Given that some OPEC+ members such as Nigeria and Angola are struggling to meet their quotas, Saudi Arabia and the UAE can readily make up the shortfalls to meet collective targets, maintaining the agreement and keeping international criticism at bay, so this remains a happy halfway house.

Although the worst of the COVID-19 pandemic appears to be over, its persistence is a constant reminder that demand can quickly fall and turn an under-supplied market into an over-supplied one. The spectre of the pandemic certainly continues to shape OPEC+ policy, which remains not only cautious but also committed to finding price stability.

Keeping control over volatile prices

Neither the Saudis nor the Emiratis will make sudden movements which could undermine the stability of the group and risk sharpening the inclines and declines of oil price volatility – they are already focused on riding the rollercoaster, keeping both the bears and the bulls in the same car and sitting equidistant between them.

Reports that Russia may cut military operations near Kyiv, whether genuine or not, drove down the oil price from $114 to $107/barrel, highlighting the flightiness of market sensibilities. And the imminent return of Iranian barrels to the market will further soften the oil price as Tehran undercuts its neighbours to shore up its market share.

Resisting on oil gives political leverage to the Gulf 2nd part

But US shale looks far from bouncing back and responding to stronger price signals – it is now much more of a sideshow issue between the Biden administration and producers than a challenge to OPEC+ members. It must be comforting for Saudi energy minister Abdulaziz bin Salman to know the ‘other swing producer’ has all but effectively gone AWOL.

MbZ may have been the first Gulf leader to take the approach of decision-making being guided primarily by national interest rather than interests shared with partners, but his younger counterpart MbS has quickly followed suit and is content not to come to the market’s rescue. Doing so would not serve the kingdom. He has also declined to ‘bandwagon’ with the US and Europe in opposing Russia’s invasion of Ukraine.

Seen through the lens of OPEC+, Saudi Arabia’s decision not to publicly increase output enhances its predominance over the group, and earns significant political capital with the Kremlin which it can use later. But whether this will be for leverage on behalf of, or over, the US and Europe will be determined by how far those two are willing to go to meet the kingdom’s demands.