BY MARIA MAALOUF
There are many speculative theories about last month’s deal between Saudi Arabia and Russia to cut oil production due to the low demand and low prices caused by the coronavirus pandemic and the resultant global economic recession. One school of thought predicts the deal’s collapse, others see the rise of new oil producers, such as in Africa, while yet more believe that China’s post-virus actions are so unpredictable that its economic policies could increase or depress the demand for oil.
The most important aspect of the OPEC+ oil deal is the US’ strategic interests in it and the personal stakes for President Donald Trump in its signing and its continuation.
Many in Russia are not happy with the deal, especially those who want Moscow to have more independence in its oil production and pricing. However, these concerns are not about to scuttle such a significant oil deal.
At the heart of the deal are Trump’s worries about the US economy. He hailed the move as a measure that will save hundreds of thousands of American jobs. He was right on this because the deal should help prevent further layoffs, which could have exacerbated the unemployment problem in the US. Trump met with the leaders of large US companies and was sympathetic to their fears of extended economic losses. Unlike the last two Republican presidents from the Bush family, who were both oil businessmen, Trump is less tied to the oil sector personally, since his business interests are largely in real estate and tourism.
While America’s oil-producing companies may be struggling to survive due to the low price of oil, they can take solace from their eligibility for government funding as part of the $2 trillion stimulus package, their ability to shift to other sources of energy production, and their hope of an increase in oil production and prices at some point in the future.
The current economic crisis in America has led to efforts to regionalize many policies. This can be seen as governors from different states pool their resources to maximize economic cooperation and save money. The potential merger of one or two oil companies to join their resources and increase their capital value cannot be ruled out either.
Trump and his advisers want the Saudi-Russian deal to be part of a new American policy aimed at a renewed phase of containing China. He wants Russian President Vladimir Putin to think less about cooperating with China and more about cooperating with US allies like Saudi Arabia and the other Gulf states. This will not be easy and will take time. Trump would also like to see more cooperation between Russia and OPEC in the future.
One hurdle to such thinking is how America can lessen Europe’s dependence on Russia’s gas, while at the same time requiring Moscow to cooperate more with OPEC. This could happen on a case-by-case basis, whereby a certain European country could maintain its energy imports from Russia for a set number of years, while Moscow uses the same time period to structure a more coordinated oil policy with OPEC.
Crucial to the Saudi-Russian deal is the ability of its signers to preserve their oil markets. This is another dimension that shows greater Saudi Arabian confidence and Russian nervousness. The Kingdom has more steady clients to ship its oil to and it knows the rules of the oil market better than Russia. Despite its huge oil assets, Russia still lacks sophistication in its production methods, as most of its exploration equipment is old, with some even dating back to the communist era.
In addition, Russia’s oil marketing strategy has varied from subsidized exports to its allies, especially ex-Soviet republics, to oversupply of its exports to make more profit. Trump could help Putin organize a good production and pricing strategy in cooperation with OPEC. He will have some success in this regard because Russia will always compare its coordination with OPEC to going solo in the oil markets.
Putin is conservative in much of his behavior. He prefers a budget deficit over Russia searching for scattered and short-term oil deals with whoever is willing to buy its oil. If the Russian deal with OPEC secures its confidence that it will not lose its markets — and that it will be supported by America — US-Russian relations can be strengthened. This will hopefully have positive implications in the search for solutions to the crises in Ukraine and Syria.
Trump wants Putin to think less about cooperating with China and more about cooperating with US allies.
Politically, and this is obvious to many, Russia and Saudi Arabia want Trump to get re-elected because their deal helps rectify oil production and marketing a great deal after the tumult of the coronavirus. If Trump gets re-elected in November, he should act immediately to cement a more strategic partnership between Russia, Saudi Arabia, and OPEC. This will not rest on an exclusive energy policy to contain China, because Beijing will still have extensive economic and political contacts with the rest of the world. But it will commence with the realization that Washington, Moscow, Riyadh and the rest of the capitals of the OPEC nations will work together to gradually revise the current low oil price and low levels of production toward a growing profit margin and a bigger production quota. If this happens, Russia’s oil deal with Saudi Arabia and OPEC will ultimately lead to more concerted, realistic and successful economic and political policies for the whole world. –AN
