Question:
On 2019/7/9, the Riyadh website published that Saudi Arabia played an influential role in [the agreement signed by the Organization of the Petroleum Exporting Countries (OPEC), alongside other non-OPEC producers (Plus) last Tuesday, which was named the "Vienna Alliance"]. Does this mean a new organization has been formed to replace OPEC? Furthermore, is the mentioned Saudi role motivated by Saudi self-interest or by an external drive? What is Saudi Arabia's interest in this alliance? And how sustainable is this new alliance? May Allah reward you with goodness.
Answer:
To clarify the answer to the questions above, we will review the following matters:
First: The Reality of the Agreement:
OPEC, which includes 14 countries, approved a charter for cooperation with 10 other countries, led by Russia—a massive oil producer. This took place in Vienna on 2019/7/2, during a ministerial meeting of OPEC with those producers. The agreement was dubbed the "Vienna Alliance-OPEC Plus," with the official signing scheduled for next autumn during the planned visit of the Russian President to Saudi Arabia. These 24 countries agreed to extend the production cut agreement, which has been in place for two and a half years, for another nine months. This agreement was a documentation of the relationship that arose between Russia and Saudi Arabia (OPEC) over the last three years following the sharp drop in oil prices in 2014, after they had reached a peak of $147 per barrel. Oil continued to decline thereafter, approaching $27 per barrel in early 2016. This was done to attempt to control price movement by regulating the oil supply to suit global demand. During that period, Saudi Arabia led the OPEC agreement with Russia to reduce production by 1.2 million barrels per day for OPEC, while Russia would reduce its production by about 300,000 barrels per day. Indeed, the collapse of prices was halted, and the price per barrel rose to $55 after the agreement and continued its upward trajectory over the past two years, which was considered satisfactory for oil producers.
This new alliance of oil producers adds significant producers like Kazakhstan, Mexico, and Azerbaijan to OPEC, in addition to Russia. It makes the new "OPEC Plus" alliance control 47% of global oil production, whereas OPEC alone used to produce about a third of global production. This is supposed to significantly help oil producers control oil prices, but this is from a theoretical perspective. In practice, many other factors govern this agreement, including:
a- This agreement did not abolish the OPEC organization; rather, its members agreed upon it with other producers, most notably Russia. This means it is subject to cancellation; it is not a new organization replacing OPEC. The OPEC charter remains in place, even if new countries have come under the umbrella of "OPEC Plus." It is a voluntary agreement from which the new countries can withdraw.
b- This agreement was imposed on producers by a new reality in the oil markets: American shale oil, whose production still fluctuates up and down according to prices and is not expected to stabilize before 2025. Therefore, this agreement is likely to continue until shale oil production in the United States stabilizes and its impact on the markets becomes clear.
c- Saudi Arabia is the most prominent country among the OPEC nations supporting the agreement. It is a client state of America and cannot move outside of American policy. Therefore, America's hand in this agreement is strongly palpable, and Saudi’s agreement with Russia remains affected by the developments of American policy.
Second: The Motivations for this Alliance:
Since the collapse of oil prices in 2014, coordination between producing countries became necessary to try to regulate the supply of oil in global markets and thus control oil prices according to market requirements—namely, according to the theory of supply and demand. In past decades, this was done within the OPEC organization, which includes the largest oil producers. However, in recent years, Russia has become a giant oil producer, with its production exceeding 11 million barrels per day, meaning it produces 10% of global production. Russia used to monitor OPEC; if it reduced production and prices subsequently rose, Russia would increase its production, exploiting the price rise as it was not bound by OPEC decisions. This annoyed America, especially as it imposes sanctions on Russia. Thus, it tasked Saudi Arabia—the largest producer in OPEC and one with strong influence within it—to be active in using the necessary methods to create an alliance of some kind between OPEC and Russia to regulate Russian production within OPEC's limits, according to coordination between Saudi Arabia and Russia.
To make this coordination a reality on the ground, Saudi-Russian relations improved significantly after 2014. King Salman visited Moscow on 2017/10/4, the first visit by a Saudi king to Russia. Several meetings were held between the Russian President and the Saudi Crown Prince, and Russia was enticed by the possibility of directing large Saudi weapons contracts toward Russian military factories. Thus, Russia and Saudi Arabia inaugurated a new era of oil relations between them, all of which was during the era of the American agent Salman and his son. The Saudi-Russian efforts culminated on 2016/11/30 with the signing of the first agreement to reduce oil production between OPEC and 11 other countries, led by Russia. According to it, OPEC reduced production by 1.2 million barrels per day, while the 11 other countries reduced their production by 560,000 barrels per day; Russia's share alone of this reduction was 300,000 barrels per day. Prior to this agreement, Saudi Arabia had threatened on 2016/11/4 to flood the markets with oil, which encouraged Russia to coordinate with it for fear of flooding and falling prices, thus preventing financial distress in Russia, whose budget depends on energy exports (oil and gas) by approximately 50%.
This agreement had a positive impact on oil prices, as the price of a barrel of oil rose immediately upon signing. However, that agreement was for six months, followed by extensive discussions to extend it. Russia generally—especially since oil prices were good—wanted to increase its production to support its budget, while Saudi Arabia consistently wanted to continue reducing production as its fixed policy, even though it occasionally threatened to leave the market to its own devices—meaning it threatened a significant increase in production. This threat was always in the face of Russian attempts to end production cut operations. In a game transparent to those with insight, the American President would ask Saudi Arabia to increase oil production to curb prices, in order to encourage Russia to engage again in production cut operations with Saudi Arabia. Russia would then appear as if it were resisting the American President's policy and fearing Saudi Arabia's response to him, so Russia would be forced to rush into coordination with Saudi Arabia to reduce production. As an example of this: (Trump said Saturday in a tweet on Twitter that he spoke to King Salman bin Abdulaziz and asked him to increase the Kingdom's oil production, by up to two million barrels per day, to stop the rise in its price, and that King Salman agreed to his request. The New Arab, 2018/7/1).
What confirms the Russians' resentment of reducing production is what Al-Ain News reported on 2019/6/5 from Igor Sechin, CEO of the Russian oil giant Rosneft, on Tuesday: ("The company is discussing the possibility of obtaining compensation from the government in case a global agreement to reduce supplies is extended. Sechin questioned the logic of Russia reducing production further within the framework of an agreement between OPEC and its allies, saying: 'The United States may enhance production and obtain Russia's market share'"). Meaning that Russia saw that reducing production was not in its interest, but Saudi Arabia's threat to increase production and flood the markets—subsequently causing prices to drop significantly—would cause Russia to lose the benefit of increasing production due to the decrease in financial revenue. The result would be harmful to Russia because about half of its budget is from petroleum, so it reluctantly agrees to reduce production! This increases prices to suit the export of shale oil, which leads to the expansion of American oil companies... In other words, Saudi Arabia is an American sword held over Russia's neck to push it to reduce oil production whenever America wants that.
To realize the importance of reducing production for America, America today differs from the America of yesterday regarding oil. Shale oil production has become a reality in the United States, and its production is constantly increasing. Its increase is a vital matter for the American economy, which suffers from extremely high debt. This production and that increase need market conditions, especially price. Therefore, America tasked Saudi Arabia with the mission of reducing OPEC's oil production. On one hand, this allows American companies to obtain market shares easily, and on the other hand, it keeps the oil price high—making it economically feasible for American shale oil producers. Shale oil used to need a price of $69 per barrel to be feasible, but the development of extraction technology has lowered this figure below that. America sees its shale oil as a means for it to sit on the throne of the oil markets.
If the Saudi stick toward Russia is the threat to increase production and push prices down, the carrot consists of deluding Russia into gaining more influence in the Middle East. King Salman visited Moscow in 2017, the first by a Saudi king, and Saudi Arabia invited the Russian President to visit next autumn—likewise a rare visit for a Russian president to Saudi Arabia and only the second ever. The Russian President was the first to announce the reaching of the Vienna agreement after the meeting he held with the Saudi Crown Prince, Ibn Salman, during the G20 summit held in Osaka, Japan, on 2019/6/29. (The Russian President told Saudi Crown Prince Mohammed bin Salman that he was "happy to discuss cooperation between the two countries in the energy markets." Putin added, "The strategic partnership within (OPEC Plus) led to the stabilization of oil markets, and allowed production to be reduced and increased according to market demand requirements, which contributes to predicting investment prospects and their growth in the sector"), and Putin announced (that "the agreement will be extended in its current form and with the same quantities.") Independent Arabia, 2019/6/29. All this deludes Russia into thinking it has influence in Saudi Arabia, within OPEC, and over the oil markets! To consolidate these false concepts in the minds of the Russians, the Americans delude the Russians by showing dissatisfaction with this agreement. (Mr. Bordoff, who served as an energy advisor in the Obama administration, said: "The United States was enjoying the possibility of conducting dialogues with most major OPEC countries." Before adding: "But now, a country that is considered an adversary of America has entered, and in a leadership role in the agreement." Al Arabiya Net, 2019/7/3). Also, according to the same source, (US Secretary of State Mike Pompeo replied when asked earlier this year whether President Putin could use oil diplomacy so that Russia replaces the United States in the Middle East, saying: "I am confident that President Putin's efforts will fail.").
This is the reality of this charter, and those were its motives. As for it being permanent... this is unlikely given that Russia always tries to escape those restrictions and benefit from high oil prices by increasing production, especially since conditions in the near future may complicate Russia's commitment to this agreement, such as the trade war and its impact on oil prices, and the possibility of a return to stability in oil production in Venezuela, Libya, and Iran, and the impact that has on the markets. Added to this is that Russia's current proven oil reserves will be depleted in less than 20 years according to the current production pace, which makes it race against time to try to reap profits during this relatively short period, unless new oil fields are discovered. However, this agreement can hold until 2025, which is the year in which the level of American shale oil production is expected to stabilize, so its effect on the markets will be clearly known. Russia will then build its oil policy on those facts, which are still shrouded in much ambiguity today.
Finally, it is worth noting that the success of American policy from behind the curtain—by pushing Saudi Arabia, carrying the stick of increasing oil production and the carrot of deluding Russia with new influence in the region—its success in pushing Russia reluctantly into the "OPEC Plus" charter, will increase America's hopes for the success of its other policy: the policy of pressure and sanctions with Russia to push it to serve America against China. If America's hopes for that increase due to the success of the "OPEC Plus" plan, then American pressures against Russia will increase in intensity, even if America adds a false carrot to deceive Russia, which is easily deceived, so that it complies with American policy and becomes its servant in China's vicinity. America has already begun this through President Trump's request to President Putin during their meeting in Japan on the sidelines of the G20 summit on 2019/6/29 to include China in the Intermediate-Range Nuclear Forces Treaty if Russia wants America to return to the agreement. Since Russia sees this agreement as vital to its security, it will pressure China to accept. Because China refuses this as expected, a crisis will arise between Russia and China, and this will facilitate Russia's standing with America in China's vicinity... For all this, the new "Vienna Alliance" to regulate oil markets is an American trap for Russia, and America's success in it has dimensions larger than the strategic level.
Thus, the rulers in the Muslim lands have placed our wealth in the arena of political games between the disbelieving colonialist countries. If the interests of these countries require reducing production, those petty rulers (ruwaybidah) say, "At your service." If their interests require increasing production, they respond likewise... If their interests require taking our wealth at a cheap price, those rulers agree submissively... As for if their interests require taking it without price under the pretext of protecting their thrones, as Trump announced, they shake their heads in agreement with gratitude that their thrones were protected!! They are thus in this world:
صُمٌّ بُكْمٌ عُمْيٌ فَهُمْ لَا يَعْقِلُونَ
"Deaf, dumb, and blind - so they do not understand." (QS Al-Baqarah [2]: 171)
And in the Hereafter, they are blind and more astray in path. Allah, the Almighty, the Wise, said the truth:
وَمَنْ كَانَ فِي هَذِهِ أَعْمَى فَهُوَ فِي الْآخِرَةِ أَعْمَى وَأَضَلُّ سَبِيلاً
"And whoever is blind in this [life] will be blind in the Hereafter and more astray in way." (QS Al-Isra [17]: 72)
9th of Dhu al-Qi'dah 1440 AH 2019/07/12 CE