Oil might be a source of power, but trying to control its price is a politically hazardous business. Led by the odd pairing of the Saudi Crown Prince, Mohammad Bin Salman (MBS), and Vladimir Putin, the Opec Plus oil producers’ cartel exists to maintain a price floor for its fractious members in an energy environment where oil prices have crashed three times over the past two decades. But its importance in a geopolitical world defined by Sino-American competition is beginning to extend well beyond the gyrations of oil markets. Opec Plus has remained resilient even as the Beijing-Moscow-Tehran axis has hardened since Russia’s invasion of Ukraine, as well as the recent Chinese-brokered rapprochement between Saudi Arabia and Iran. This raises questions about whether Saudi Arabia is now defecting into the anti-Washington camp.
Opec Plus was formed in rather different geopolitical circumstances. In late 2016, the cartel constituted a rapprochement between the two large, and hitherto generally antagonistic, Eurasian oil producers as they were adjusting to the shock of the United States’ re-emergence as a top-tier oil producer. Forging an association between Opec and Moscow was an act of Saudi desperation. For the previous two years, Riyadh had sought to bankrupt the American shale sector by allowing prices to slump, but largely succeeded only in emptying its own foreign exchange reserves. When they finally reversed course in September 2016, the Saudis found that, having alienated most other Opec members with their recklessness, they could no longer control prices. Two months later, Russia and 10 other states agreed to support a second Opec oil output cut, and Opec Plus was born.
Undoubtedly, some broader geopolitical convergence between Riyadh and Moscow against Washington followed over the next three years. When King Salman visited Putin in October 2017 — the first ever state visit of a Saudi monarch to Moscow — the two leaders discussed military co-operation and the possibility of the Saudis purchasing Russian arms. But however much the threat of American shale united Opec Plus, a large geopolitical fault line ran through the new producer alliance: while Russia had been moving closer to Iran since Moscow’s intervention in Syria in September 2015, Saudi Arabia had been engaged in a proxy war with Iran in Yemen since 2014.
When, in September 2019, Iran — either alone or acting with its Houthi allies in Yemen — destroyed the large Saudi oil processing facility at Abqaiq with drones and cruise missiles, that chasm was laid bare. While the Saudis were crushed by the failure of their Patriot missile defence system, bought at great expense from the Americans, Putin appeared with the Iranian president and mock-solemnly pronounced that Moscow could sell Riyadh protection that would actually work. Denying even that Tehran was responsible for the ambush, Putin said that Russia was “supportive of Iran, wholeheartedly”.
Only four months later, Opec Plus had to deal with its first serious oil market crisis, as China’s demand plummeted at the start of the pandemic. The Russian-Saudi compact splintered. Unable to agree with Putin on how much production to cut, MBS sped off in the opposite direction, flooding the market in another bid to grab market share. In sending future prices into negative territory, MBS left it to Donald Trump, of all people, to patch Opec Plus together again — by threatening to withdraw American military support for Riyadh unless the Saudis and Russians agreed to slash output.
The Trump administration’s Abraham Accords, which saw the UAE and Bahrain normalise relations with Israel in September 2020, compounded the cartel’s lack of internal coherence on Middle Eastern matters. In oil terms, the Accords also appeared strategic: the UAE is the only member of Opec Plus other than Saudi Arabia with clear spare capacity, and Bahrain has been sitting on a known large offshore shale oil formation since 2018.
But for the past three years, events have conspired decidedly to strengthen Opec Plus. With the new Democratic administration in Washington unable to bring Iran into another nuclear deal in 2021, and post-pandemic growth in the shale sector nearly entirely concentrated in the Permian Basin, Biden, just eight months into office, had to ask Opec Plus to increase production. His trip to Riyadh the following summer for the same purpose yielded little. Indeed, in the months after Biden’s visit, Opec Plus appeared to toy with the American president, announcing a major production cut just weeks before the mid-term elections. Unable at any time during his presidency to influence the cartel, Biden has had to release so much reserve US oil that in March 2023 the Strategic Petroleum Reserve contained only 58% of what it did three years previously.
Russia’s war has only amplified the autonomy of the Arab members of Opec Plus, paradoxically by recasting China’s role in the oil market. From at least the time of the cartel’s inception, the Chinese leadership has wished to deepen its relations with all the major Middle Eastern oil producers. Most ambitiously, it reached an agreement with Iran in 2019 — formalised in 2021 — on a 25-year co-operation programme, which will see China make large investments in Iran’s oil and gas sector.
But prior to February 2022, China was also willing to act with other large consumer countries to counter Opec Plus’s influence on oil markets. Notably, when prices were rising in the second half of 2021, China agreed to co-ordinate withdrawals from its reserves with those Washington was then making. Now, Moscow’s war against Ukraine appears to have ended any structural rationale for Sino-American co-operation on oil. As China can benefit from discounted Russian crude, it does not share the American interest in forcing Opec Plus collectively to supply more oil to bring down Middle Eastern prices. Moreover, oil and gas security for China lies only in maintaining diversity of supply, and hence avoiding over-dependence on Russia. Therefore Beijing’s interest lies in preventing a bifurcation of the Opec Plus market between Asia and Europe, as well as reducing the vulnerability of passage of tankers through the Strait of Hormuz to Saudi-Iranian friction.
These changes have restructured Saudi choices in a world in which Washington expects its allies to take its side in the Sino-American conflict. In the tech war at least, Saudi Arabia has chosen to align with China. This reality was made very clear in December 2022, when MBS hosted Chinese Premier Xi Jinping in Riyadh for two China-Gulf summits. In finalising a Comprehensive Strategic Partnership Agreement, first mooted in 2019, the two states promised “firmly [to] support each other’s core interests”. Meanwhile Huawei struck a number of investment partnerships with Saudi firms. This year, Saudi Arabia appears to have begun applying this binary geopolitical logic to relations with its long-term regional antagonist Iran, allowing China to broker a rapprochement that has restored diplomatic ties between the two states after a seven-year break.
The Saudi shift has been replicated by other Arab members of Opec Plus, not least the two Abraham Accord states. In February 2022, the UAE agreed to buy fighter jets from China. Two months earlier, it had pulled out of a prior agreement to buy American F35s, struck as a side deal to the Abraham Accords, because it would not meet Washington’s demands over cutting out Huawei from its 5G infrastructure. Most strikingly, Bahrain has, under the umbrella of the Chinese-sponsored Saudi-Iran rapprochement, moved towards normalising relations with Iran — despite the fact that Iran has long had a territorially revisionist approach to the archipelago kingdom and backs the country’s opposition groups.
In the UAE’s case, closer relations with Tehran and Beijing are matched by deepening ties with Russia: in January this year, the US State Department sanctioned individuals and firms in the UAE with links to the Wagner Group, and Russian money has moved to the UAE to escape Western financial measures against Moscow. This Arab version of Obama’s attempted Pivot to Asia cannot but have at least some military ramifications in the Persian Gulf, given that Bahrain is host to the Fifth Fleet of the US Navy and US Naval Forces Central Command. Last May, the UAE withdrew from the US-led Combined Maritime Forces. A month later, reports surfaced in the Qatari press that China was co-ordinating naval collaboration between Saudi Arabia, Iran, the UAE, and Oman in the Persian Gulf.
Yet where this Saudi-led tilt to China leads geopolitically is still open to contest. The strength of the emerging anti-US Eurasian bloc can easily be overstated. There is no evidence that Washington intends to concede it naval dominance in the Persian Gulf or that China has the maritime power capacity to replace it. All the challenger-powers, including Saudi Arabia, are vulnerable to serious domestic political disorder. The scale of Saudi’s present additional oil capacity is far from clear. Indeed, the collective output of Opec Plus has been largely stagnant for the best part of two decades.
Meanwhile, Saudi Arabia is not taking China’s side on finance. Although Beijing may be pushing for the Saudis and other Opec Plus members to accept the renminbi as payment for oil and gas, there is no evidence that Saudi Arabia is moving to purchase their financial assets. By sharp contrast, when the United States moved towards a privileged relationship with Riyadh in the Seventies, to enhance its oil security, the Saudis did rapidly increase their dollar assets. Indeed, it is precisely the legacy of that financial turn to the United States, including the peg between the Saudi currency and the dollar, that constrains Saudi options in the financial and monetary space now.
Nonetheless, the Biden administration’s bet that the energy transition over the next two decades will reduce American oil demand enough to allow Saudi Arabia at least partially to drift is likely to be sorely tested. While the International Energy Agency judges that the most significant extra output over the next five years will come from outside Opec Plus, it also predicts that the Middle Eastern members of the cartel will dominate medium- to long-term oil production as the shale fields are depleted. Even if electric vehicle usage soars, any sizeable reduction in oil consumption in the medium term requires substitutes for petrochemicals.
In this scenario, Saudi Arabia has a resource that will probably be more important to the United States in the 2030s than it is now. Consequently, the largest Gulf producer and its Arab allies may have options in navigating between the respective pulls of the United States and China that other states, without a crucial commodity to export, do not possess. But the degree of energy unknowns in play, and the resilience of American financial power, mean that hedging between economic gain and security alliances is still a high-risk strategy. In this turbulent geopolitical world, this Saudi dilemma can only make the Persian Gulf a direct site of the rapidly-spreading Sino-American competition.
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Source: UnHerd Read the original article here: https://unherd.com/