About the authors: David H. Rundell is the author of Vision or Mirage, Saudi Arabia at the Crossroads and a former chief of mission at the US in Riyadh. Ambassador Michael Gfoeller is a former political advisor to the US Central Command. Both are partners at Arabia Analytica.
Saudi Arabia’s energy alliance with Russia has become the predominant factor in today’s global energy market. Riyadh and Moscow have exerted enormous influence over oil production and pricing over the last six years. There have been promising recent developments, including Saudi’s new willingness this week to increase oil production, that indicate they are serious about avoiding a global recession. But will it be enough?
Saudi Arabia and Russia’s alliance underpins the arrangement known as OPEC+, a coalition founded in November 2016, made up of 23 energy producing countries, including the 13 member states of OPEC and 10 additional oil producers. The two dominant members of OPEC+, Saudi Arabia and Russia, collectively produce over 20% of global oil output, or half of OPEC+’s total production. Together the members of OPEC+ control over 55% of global oil production and considerably more of the oil exported to international markets.
The war in Ukraine has increased the importance of the Saudi-Russian energy alliance. It has introduced political-military risk into the market and driven gasoline prices to record levels. Unfortunately, the Western strategy to deprive Moscow of its massive oil and natural gas export revenue has largely backfired. Indeed, it now appears that thanks to rising prices, Russia’s oil export revenue has actually increased by many billions of dollars. After initially falling at the start of the war, Russian oil export volumes have risen sharply, reaching 8.1 million barrels per day by the end of April. Likewise, the Russian ruble is now 40% stronger against the dollar than it was at the start of the war. Those who bought the ruble when it initially collapsed in March have doubled their money in three months. As a result of these developments, Russia now seems on track to achieve a capital account surplus of over $260 billion this year, more than twice as much as in 2021.
Russia is actively working to redirect oil exports away from Western Europe and toward growing Asian markets, particularly China and India. However, its economic resilience so far has been due largely to the energy alliance with Saudi Arabia. In previous international energy crises, the West could rely upon its partnership with Saudi Arabia to boost oil production and thus alleviate the economic pain felt by consumers. Over the past four decades this has happened many, many times when wars, storms, labor unrest or US economic sanctions disrupted oil markets. But the events following the start of the war in Ukraine called that relationship into question, as the Saudis and their OPEC+ partners policy declined to significantly increase output.
OPEC+ was largely an initiative of Saudi Crown Prince Mohammad bin Salman and his brother, Energy Minister Abdulaziz bin Salman. It has paid off for their country. After contracting sharply during the Covid crisis, Saudi Arabia’s economy is now expected to grow by 7% this year. As the kingdom’s oil revenues increased by 58% during the first quarter of this year, the publicly traded national oil company Saudi Aramco posted an 82% increase in profits. The Saudi budget is back in the black and Saudi Aramco is investing billions to increase its oil production capacity.
During the Cold War, Saudi Arabia was the most dependable US ally in the Arab world, a partner that shared an interest in limiting Soviet oil revenues. Today the Saudi-Russian energy alliance is a pragmatic partnership providing concrete economic benefits to both sides. In geopolitical terms, their alliance’s obvious success represents a significant net decrease in the ability of the Western powers to rely upon the Saudis and their Gulf allies in a time of crisis.
This new situation raises questions about how the Western powers might rebuild their relationship with the Saudis. Clearly a revival of diplomatic engagement at the highest levels would be a good first step. From Riyadh’s perspective, for many years the West has seemed intent on distancing itself from the region’s Arab monarchies and ignoring their security concerns. Yet Saudi Arabia has now agreed to extend its two-month-old truce with the Iranian-backed Houthis and would clearly like to end its expensive war in Yemen. Likewise, the Saudis do not want to see the global economy plunged into a demand-destroying recession.
In that context OPEC+ has now indicated a willingness to increase its planned production quotas. Reports of a possible US-Saudi summit meeting represent a very positive signal. There is much to be gained for both sides.
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