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Russian Foreign Minister Sergei Lavrov arriving in Saudi Arabia, May 31 2022
Briefly, let me first deal with the long-term — not least as there is little to add to what has been written previously about the potential impact on US Middle East policy of ‘peak oil’, coupled with the ‘pivot to Asia’. While Russia’s invasion of Ukraine has undoubtedly been an economic boon to oil producing countries — witness, for example, the 2022Q2 surge in Saudi Aramco’s profits to a new record high — it will surely accelerate the drive to decarbonisation throughout the global economy. This is most immediately notable in Europe. However, the so far lesser impact in the US stands to be both enhanced and accelerated by Mr Biden’s signature Inflation Reduction Act, with the US$369bn earmarked for addressing climate change forecast to reduce carbon emissions by a whopping 40% by 2030.
Turning to the shorter-term, I agree with oil expert Helima Croft (quoted above) that the Biden Administration must have been disappointed to see OPEC+ increase output by just 100,000bpd when it last met on 3 August. This despite the front-loading at the June meeting of increases previously agreed for later in the year, which may have owed more to Crown Prince Mohammad bin Salman’s desire to be courted by Mr Biden than any economic considerations.
To be fair to the Saudis, this was not all about politics by any means. There are sound economic and technical reasons for such a modest increase which will likely remain decisive when OPEC+ next meets on 5 September.
On the economic front, the August meeting took place in the immediate aftermath of a sharp decline in the price of Brent crude of around US$20pb to below US$100pb for the first time since early April. Furthermore, the global economic outlook remains gloomy, to say the least. The IMF cut its growth forecasts yet again at the end of last month for both 2022 and 2023, which, ceteris paribus, only encourages further downward pressure on the oil price.
On the technical side, as OPEC itself noted, there is “severely limited availability of excess capacity.” What there is, is almost entirely in the hands of Saudi Arabia and the UAE. But the Saudis are already pumping around 11mbpd out of a total capacity estimated at 12mbpd and there is a significant degree of doubt among experts that even this can be sustained. Furthermore, as Justin Jacobs noted in the 26 July edition of the FT’s EnergySource newsletter, there are at least two possible sources of a supply-side shock in the immediate future, arguing in favour of holding back some reserves.
First, the imminent hurricane season (also the subject of gloomy forecasts) could disrupt output in the Gulf of Mexico.
Second, there are the moves by the EU and UK to curtail Russia’s oil exports. The details of the proposed oil and insurance embargoes are proving even trickier than I anticipated in the 4 July Newsletter (and stands to get more difficult still if, as is likely, the next Italian government proves to be more sympathetic to Moscow than the outgoing one has been). However, that Russia’s exports have, to date, only been marginally reduced by Western sanctions may spur rapid agreement with the US on price-capping sales to third countries which would clear the way for the currently stalled ban on insuring vessels carrying Russian crude. Nevertheless, the IEA is now forecasting an increase in global oil demand of 380,000bpd by the end of this year thanks to a gas-to-oil switch in Europe for power generation.
Pulling all these strands together, it remains the case that the oil market continues to be mired in uncertainty — which brings us back to the politics at a time when Carnegie’s Eugene Rumer is echoing the view of many in Riyadh in seeing the US as “a less reliable partner.” From Riyadh’s perspective these two uncertainties make keeping Russia firmly in the OPEC+ fold highly desirable even at the cost of frustrating Washington. As Brian Bennett wrote recently in Time: “Saudi Arabia…sees its relationship with oil-rich Russia as a way to help influence global energy markets, on which the Saudi economy largely depends”; and, as Mr Rumer notes in the same article, Russia’s President Vladimir Putin “is only happy to jump in where the United States seems to be leaving some vacuum.” Especially if, in so doing, he might just help further to erode the original cornerstone of Saudi/US relations, with all which this might imply for the grand bargain as a whole.