Saudi Arabia’s Declared Price War Strains Ties with Old and New Partners

KSA

Energy Policy

Commentary

Rauf Mammadov

Saudi Arabia finds itself in the unenviable position of trying to maximize its oil revenues in a catastrophic market while repairing the damage it has caused to the kingdom’s long-standing relationship with the United States and its fledgling ties with Russia. In Washington, congressional pressure to punish Riyadh for its role in damaging the U.S. oil industry is increasing. For Moscow, months of quiet diplomacy with the Saudis threaten to unravel as a consequence of the row.

Saudi’s decision to start an international oil price war in hopes of punishing Russia for its refusal to sign a new OPEC+ production-limiting agreement led to this predicament, all while the COVID-19 pandemic has been simultaneously crushing global demand for energy sources. The Saudi move sent already weakened oil prices hurtling toward collapse, devastating both the American and Russian oil industries. The Saudis’ spigots-open strategy, aimed at grabbing the market share away from Russia and wounding the American shale industry, has angered both Moscow and Washington.

In the U.S. Congress–where many Republicans had acquiesced to President Donald Trump’s passivity over investigating the murder of Washington Post columnist Jamal Khashoggi in 2018–is now seething over the damage the price war has wreaked on the American shale industry. Meanwhile, Russia, who had participated in the OPEC+ output-capping deals to prevent oil prices from tumbling, no longer trusts Riyadh. It also remains perturbed by oil discounts Saudi Arabia offered to its European and Asian customers amidst the dispute in an attempt to grab a larger share of the energy market away from Russia. American shale producers are likewise discontented from Riyadh’s oil war that led to a glut in global supply and sank America’s benchmark crude–West Texas Intermediate–below zero for the first time ever. However, U.S. oil producers might find some consolation in knowing that Saudi tankers off the U.S. Pacific coast wait to unload their oil in a country that is awash in its supply–a sign that the Saudi tankers may in fact need to take their crude elsewhere.

U.S. Politicians Want to Ping Riyadh

Last month, prominent members in the U.S. Congress turned to Trump to intervene on behalf of America’s shale industry, contending that Saudi Arabia’s flooding of the market was reckless and not only harmed the global oil industry, but the wider world economy. U.S. lawmakers are now threatening legislation to remove U.S. soldiers from the kingdom.

In 2018, Trump had rejected a bipartisan-backed request from a group of U.S. senators to penalize Saudi Arabia for the role several top Saudi officials played in  Khashoggi’s murder at the Saudi Consulate in Istanbul. Khashoggi, a permanent resident from Saudi Arabia, had written many columns critical of the Saudi government and the new policies of Crown Prince Mohammad bin Salman (MbS). Yet, Trump defended his decision on the grounds that Riyadh was doing the U.S. and world economies a favor by working with Russia to increase oil prices.

This time around, however, some members of Congress contend that Trump’s previous defense on behalf of the Saudis–that they were propping up global oil prices–is no longer valid. On the contrary, critics contend that the Saudi-generated price war has caused prices to tailspin and placed American oil companies on the brink of folding.

Saudi Relations with Russia have Unraveled, too

Oil prices were wallowing in 2016 when Saudi Arabia proposed Russia to partner with OPEC to boost prices. According to the Saudis, prices would remain low unless Russia–a major producer–joined the Saudi-led cartel in cutting production quotas. Moscow agreed, and the first OPEC+ agreement was signed and extended twice thereafter before this year. But Moscow balked at a third extension in March under pressure from Russian oil tycoons close to the Kremlin who have generally opposed production cuts. The Saudis initiated the price war in response to Russia’s refusal.

By the time Trump intervened in mid-April, both the Russian oil industry and its U.S. competitors were reeling. Only after intense bilateral negotiations did Russia join Saudi Arabia in forging a new OPEC+ accord, albeit an agreement under terms less favorable to Moscow than those rejected back in March. The Saudis then reneged on a pledge to acquire a controlling stake in Russia’s largest oil and gas equipment supplier Novomet in an apparent move to assert their influence in the global energy market.

Russian officials have struggled to conceal their anger over Riyadh’s conduct. Russian President Vladimir Putin publicly accused Russia’s “partners” – a reference to Riyadh – of sparking the price war to hurt the U.S. shale industry and provoke animosity between the U.S. and Saudi Arabia. Energy Minister Alexander Novak also lambasted the Saudis, calling their decision to enter a price war and grab Russian market shares as “irrational.”

Has the Saudi Maneuver Backfired?

Historically, Saudi Arabia had pursued a foreign policy that consisted of putting all its eggs in one basket close alignment with the United States. Riyadh considered the OPEC+ deals with Russia an important step toward achieving more balanced relations with major world powers. But the oil war has compromised that strategy by upsetting both the United States and Russia.

Moreover, the debacle also has domestic implications for the Saudis. MbS’s ambitious Vision 2030 plan is a major push to diversify Saudi Arabia’s economy away from non-renewable energy. However, the Saudis must maximize oil profits over the next decade in order to generate the money necessary to obtain their diversification targets. By Riyadh’s calculations, Saudi Arabia will need to capture a larger share of an increasingly competitive world market, which is a goal requiring aggressive tactics that risk riling both the United States and Russia.

The Washington-Riyadh relationship has exposed a growing tension in the past half-decade as the United States has gone from being a major consumer of Saudi oil to a market competitor. Russia has also felt the impact of U.S. competition: America’s skyrocketing shale output is behind the global oil surplus that has reduced prices. It was only recently that Russia believed an alliance with the Saudis could counter American competition. But Riyadh undermined its reputation as an oil-markets stabilizer when it flooded the world market with discounted crude in a retaliatory move toward Moscow. Saudi Arabia must now be shrewd in its relations with both countries going forward or it risks losing both the U.S. and Russia as partners.

Rauf Mammadov is a resident scholar on energy policy at the Middle East Institute. He focuses on issues of energy security, global energy industry trends, as well as energy relations between the Middle East, Central Asia, and South Caucasus.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.