Following Organization of the Petroleum Exporting Countries’ (OPEC) decision to cut oil supply for the first time in over a year, it has become clear just how serious the group is about managing global crude markets. With Russian oil and gas now largely off the market to western consumers and governments, OPEC’s group leader Saudi Arabia finally has the ally it needs to fix global oil prices. Indeed, this will allow it to maintain the high prices required to support government spending without relying on tenuous agreements with other OPEC members.
This relationship all started on the 3rd March 1938, when the American company that would eventually become Chevron, struck oil in Dhahran, Saudi Arabia. This would soon be identified as the largest oil field in existence and would propel Saudi Arabia from a country of nomads with a government funded mostly by religious tourism, to a major player in global politics. In 2018, oil exports accounted for 87% of government revenues and around 42% of GDP.
The country has previously been plagued by turbulent fiscal policy as global oil prices have veered backwards and forwards from highs to lows. The history of OPEC can largely be seen as Saudi Arabia trying to encourage other members to participate in joint supply restrictions, while being forced to personally enact the majority of cuts to supply.
Saudi Arabia has therefore typically found that the only method by which it can reliably regulate oil prices is by cutting its own production. Recently, the oil nation has seen its already limited influence waning by the expansion of US shale and the discovery of natural gas off the coast of Israel. Both discoveries seriously weakened the sting of possible Saudi Arabian oil restrictions and therefore reduced Saudi Arabia’s ability to influence both global politics and prices.
However, the current geopolitical situation in Europe which has seen Russian oil and gas leave the market for most European consumers has created a profound shift. The western sanctions imposed on Russia has opened up an opportunity for Saudi Arabia to use its position as a swing producer to great advantage, while world energy supply markets are still rearing from the initial supply shock caused by Russian sanctions.
Saudi Arabian oil is now key to preventing many global economies from collapsing as everyday products and services become infeasibly expensive and households struggle to meet higher energy costs. In the past, Saudi Arabia would have used its rediscovered dominant position to achieve geopolitical ambitions in the Middle East. However, warming relationships with Israel and tensions with Iran have aligned Saudi Arabia with Western powers on many geopolitical issues. Consequently, the main advantage of the current supply shock for the country is to enable more effective price-gouging.
We have seen a move towards this strategy before when supply increases were promised during a meeting with President Biden. Yet, OPEC+ have already made a U-turn on this in August, agreeing to begin cutting production to maintain current prices. This will surely continue until global energy systems adapt to plug the gap in the market created by Russian oil and gas.
Saudi Arabia’s position has been further strengthened by the lack of progress on a new agreement surrounding Iran’s nuclear program. Without a new agreement, the US continues to maintain the embargoes on desperately needed Iranian crude oil. This means that short-term prices will be further driven by the remaining OPEC members’ choices.
One key question is whether this new negotiating power with the West will be used to further King Salman Al Saud’s political desires in the Middle East, namely his desire for further US support in the proxy wars being waged in Yemen and Syria. It is difficult to imagine the Biden administration being able to make any further pledges on this subject as the Western involvement in these conflicts is already being questioned by multiple humanitarian organisations. However, when faced with a choice between global recession and a foreign policy loss, the administration may be forced into pledging further support.
The current geopolitical tensions existing between both Russia and the West, as well as within the Middle East, therefore seem to have left Saudi Arabia and the remaining OPEC members holding all the cards; the only questions remaining regard what supply restrictions will be settled on and whether Western foreign policy goals be compromised to secure short term cooperation.
