Saudi Crown Prince bin Salman joins Russia to cut oil production

OPEC+ additional cuts… Cold water for the US, which has been trying to reduce inflation

On March 16, Saudi Energy Minister Abdulaziz bin Salman and Russian Deputy Prime Minister and Energy Minister Alexander Novak held an emergency meeting in Riyadh, the capital of Saudi Arabia. This is because the price of West Texas Intermediate (WTI) in the United States fell below $70 per barrel for the first time since December 20, 2021 the day before. The reason for the plunge in international oil prices is that concerns over the possibility of a recurrence of the global financial crisis affected the market following the bankruptcy of Silicon Valley Bank (SVB) in the U.S. and the liquidity crisis in Credit Suisse (CS) in Europe. The two ministers made an agreement to raise international oil prices, but parted ways without disclosing it to the media.

On April 2, OPEC+, a consultative group between Saudi-led Organization of Petroleum Exporting Countries (OPEC) member countries and non-OPEC oil producers such as Russia, announced measures to further drastically reduce crude oil production. It was decided to cut crude oil production by 1.16 million barrels per day from May to the end of the year. Saudi Arabia 500,000 barrels, Iraq 211,000 barrels, United Arab Emirates (UAE) 144,000 barrels, Kuwait 128,000 barrels, Kazakhstan 78,000 barrels, Algeria 48,000 barrels, Oman 40,000 barrels.

Russia, which cut production by 500,000 barrels a day from March to June in retaliation for the introduction of the Western price cap, has also decided to extend the related measures until the end of the year. Eventually, from May, crude oil production is expected to drop by 1.66 million barrels per day. The total production cut is 3.7% of global demand. This production cut is a separate measure from the 2 million barrels per day cut decided at the OPEC+ meeting in October last year.

What is the reason Saudi Crown Prince and Prime Minister Mohammed bin Salman decided to cut additional crude oil production in partnership with Russian President Vladimir Putin? Reports from Energy Minister Abdul Aziz, his half-brother, appear to have had a significant impact on Crown Prince Muhammad’s decision. Minister Abdulaziz has submitted a report suggesting oil prices could fall below $50 a barrel, which could jeopardize Saudi Arabia’s massive spending plans.

The International Monetary Fund (IMF) estimates international oil prices to balance the fiscal balance at $66.80 per barrel for Saudi Arabia and $65.80 for the UAE. It believed that government finances could pass the break-even point only when oil prices were formed above that level. Crown Prince Mohammed is promoting ‘Vision 2030’, a policy of economic reform away from oil. If international oil prices fall below $66 per barrel, all large-scale projects such as the construction of the smart city ‘NEOM City’ may have to be suspended. Middle East expert Kristian Coates Ulrichsen, a research fellow at the Baker Institute for Public Policy at Rice University, said the decision was made to keep oil prices high enough to finance Crown Prince Mohammed’s ambitious and large-scale projects.

According to Crown Prince Mohammed’s Vision 2030 plan, Saudi Arabia is already investing 500 billion dollars (about 662 trillion won) in the desert and mountainous area adjacent to the Red Sea to build Neom City, which is 44 times the size of Seoul. Saudi Arabia expects the city to be home to 9 million people when completed in 2030.

On March 18 of last year, when international oil prices broke through the $100 mark again in three trading days due to concerns about a decrease in supply from Russia, oil prices soared. The photo shows a gas station in Seoul at the time. [뉴스1]

Saudi Arabia is also building a ‘King Salman International Airport’ with six runways in the capital, Riyadh. King Salman Airport will be built on a 57 km2 site that includes the existing King Khalid International Airport, and the scale is enormous as it plans to have six runways. Korea’s Incheon International Airport and Singapore’s Changi Airport, which are leading the global airport rankings, have four and three runways, respectively. Once completed, King Salman Airport is expected to handle 120 million travelers a year. The Saudi government emphasized that the airport project is a way to transform Riyadh into one of the world’s top 10 economic cities, and that it will increase the population of Riyadh from 8 million to 15 to 20 million by 2030.

In March, Saudi Arabia announced the establishment of a second national airline, Riyadh Air, and also announced plans to establish a third national airline, Neom Airline. It even signed a contract to purchase 121 787 Dreamliners (worth about 48.8 trillion won) from Boeing, an American aircraft manufacturer. A huge amount of oil money is needed to go ahead with these grandiose plans. This is why Crown Prince Mohammed has decided to further cut crude oil production to maintain high oil prices.

Another intention of Crown Prince Mohammed is that he wants Saudi Arabia to maintain its ‘swing producer’ status in international energy markets until at least 2030. A swing producer refers to an oil-producing country that affects supply and demand in the international oil market through its own production adjustment. Following the West’s cap on the price of Russian oil, the United States overtook Russia to become the largest exporter of crude oil in Europe. In particular, the United States achieved the first place in crude oil exporting, occupying ‘oil hegemony’ for the first time since the 1950s. Daniel Yergin, vice president of S&P Global, an energy expert, said, “The United States has risen to a dominant position in the global energy sector again since the 1950s.”

A view of Neom City’s Oksagon, led by Crown Prince Mohammed bin Salman. [네옴시티 홈페이지]

If the United States dominates crude oil production and international oil prices, Saudi Arabia will have no choice but to accept a weakening of its influence and significant economic disadvantages. This is the background to Crown Prince Mohammed’s efforts to control the supply and demand of the international oil market and control oil prices, forming an energy alliance with Russia to check the US’ oil supremacy. Saudi Arabia and Russia are the world’s second and third largest oil producers, accounting for 25% of the world’s crude oil production. Russia, which is running out of finances due to Ukraine-related warfare, welcomed Saudi Arabia’s proposal with both hands.

The problem is that OPEC+’s additional production cuts, led by Saudi Arabia, have put cold water on the efforts of Western countries, including the United States, who have been struggling to control inflation. If international oil prices rise, various policies that Western countries have pursued to control prices may go to waste. In fact, international oil prices broke through the $80 per barrel mark after the announcement of production cuts. There are even predictions that it could exceed $100 per barrel. Swiss investment bank UBS has predicted that Brent oil prices will reach $100 a barrel by June. US investment bank Goldman Sachs also raised its year-end Brent crude price forecast from $90 per barrel to $95 per barrel. Central banks of Western countries, including the United States, are struggling to come up with countermeasures, such as raising interest rates, as a rise in international oil prices could boost inflation again.

Chinese President Xi Jinping (left) greets Crown Prince Mohammed bin Salman at the Saudi Royal Palace on December 8, 2018. [SPA]

One thing to note is that the United States, unlike in the past, is refraining from criticizing Saudi Arabia. White House National Security Council (NSC) Strategic Communications Coordinator John Kirby said, “Given the uncertainty in the market, OPEC+’s further production cuts are undesirable.” It is quite different from the US government’s announcement in October of last year that it would reconsider its relationship with Saudi Arabia, saying that it was a short-sighted decision and that there would be consequences after OPEC+ cut production by 2 million barrels per day. The reason why the U.S. refrains from a furious reaction is because it lacks the means to respond. The US Strategic Reserve (SPR) currently holds 371 million barrels, about half of the total. The U.S. released 180 million barrels of SPR last year to stabilize oil prices that soared after Russia invaded Ukraine. Even if the US releases SPR again, if OPEC+ adjusts production, only SPR can be exhausted without much effect.

The most important reason for the US change in attitude is the change in geopolitical dynamics in the Middle East. Saudi Arabia is actively working to restore relations with Middle Eastern countries, including Iran and Syria, which have recently been subject to US sanctions. Following the agreement to restore diplomatic relations with Iran through Chinese mediation, a summit meeting between the two countries is expected to be pursued. Saudi Arabia is also showing signs of inviting Syrian President Bashar al-Assad to the Arab League (AL) summit to be held in May. Saudi Arabia recently decided to participate as a dialogue partner in the Shanghai Cooperation Organization (SCO), which was created by China and Russia to keep the US in check.

In particular, Saudi Arabia is strengthening its relationship with China, the world’s largest energy consumer. The New York Times evaluated that “the relationship between the United States and Saudi Arabia is becoming more complicated as China, which mediated the reconciliation between Saudi Arabia and Iran, is growing its influence in the Middle East.” The United States may have judged that if it pushed Saudi Arabia again in this situation, the relationship between the two countries would deteriorate to an irreversible level, and on the contrary, it would help China expand its influence in the Middle East. It is not certain whether Crown Prince Mohammed’s ‘match-up’ will succeed, but it is undeniable that the production cuts have once again proven that oil is a ‘strategic weapon’.

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Janghoon Lee International Affairs Analyst [email protected]

Source: Donga

Mark

Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.