Credit: Egor Aleyev/TASS
The Vienna agreement by Saudi-led OPEC and a number of non-OPEC countries (first of all, Russia) confounded sceptics. It sent a positive signal to the energy sector and geopolitics, too. Based on the preliminary Beijing deal, the document was signed on May 25 by 25 states. The agreement extended production cuts for another nine months, limiting Russia to 10.9 million barrels and OPEC to 32.5 million barrels a day.
The Regulator Stays in the East
It was the second time after the initial deal on output cuts in December 2016 in Vienna that the community of Islamic states – despite their differences – delivered an important signal. The pendulum of the hydrocarbons balance has been and will remain in the hands of the Muslim world for many years to come.
In other words, the speculation that the US will take over regulation of the market, as ironic Mark Twain once suggested, have turned out to be no more than a rumour.
The OPEC and Russia (which has the right to believe it is part of the Islamic as well as the Christian world) are the true leaders. Together with their partners in the voluntary quota deal, they account for half of global output.
No one argues that the world might be seeing more crude oil supplies from other regions stealing some of the share of the Middle East and the Caspian Sea. However, it is their share that satisfies the imports needs of other countries. The US might be ramping up production but it is primary consumed domestically. It is also true of the UK and some other Western countries. And it is OPEC’s core that heats the planet’s oil-poor areas.
OPEC SecGen Mohammed Barkindo first met with Dmitry Medvedev outside Moscow and then flew to St Petersburg to take part in the 21st Economic Forum. He spoke not just on behalf of the cartel and its member states but of millions of like-minded individuals sharing the same faith. He spoke of the challenging wave of crises and depressions that OPEC was facing until it finally summoned the will to unite its efforts with Russia on the oil market. Russians also believe in this superior force that instills us with a strong spirit and wisdom during the dramatic pages of history.
Saudi Energy Minister Khalid Al-Falih’s confident projection that the oil demand will peak out in the 2050s aroused broad interest even from laymen. It is not surprising – previous forecasts for at least waning demand gave oil and gas no more than 20 years – 30 years maximum. And the industry leader of the major energy power comes to Russia’s city of St Petersburg to deliver a new substantiated positive projection.
There have been other events during the economic forum in Russia’s second-largest city that added hope in the international energy sector. One of them is expanding dialogue between the Islamic world and Russia. Take, for instance, a mutually binding deal between Iraq’s Kurdistan and oil giant Rosneft that paves the way for multilateral win-win partnership. It will get access to the largest pipeline in the Middle East which is expected to increase capacity from 700,000 to 1 million barrels a day in the coming months.
In the meantime, the market is regaining price stability – thanks to OPEC – and minor fluctuations do not dampen market hopes. Recovery has been fueled by higher exports and a number of other factors. One of them is the slow but tangible improvement in the living standards and gender democracy in some Gulf countries. Saudi Arabia is ready to let women drive.
This move would double petrol sales for cars in the desert kingdom. Recently, the authorities yielded to the demands of the youth to roll back its anti-noise campaign, a decision that saw roaring parties increasingly pollute Oriental skies with myriads of disco lights. Riyadh’s ‘More oil for ourselves’ slogan looks very much like Egypt’s ‘More gas for ourselves’. Indeed, Egypt, a non-OPEC country, made energy headlines last week when it announced that the number of households connected to the gas grid rose to 7.9 million – thanks to its mega reserves in the Nile delta.
In neighboring Arab states labor migrants from Egypt, India, Pakistan and the Philippines began to buy fridges and air conditioners despite the remaining gap in income between them and the locals. In short, bigger energy demand coming from inside the region leads to shrinking exports and, as an upside, higher prices.
A production cut is a sign of flexibility by Islamic states, not ‘dogmatism’ as the West calls it. They are flexible towards those who are struggling to meet the Vienna quotes. Like Nigeria which is formally part of OPEC but has escaped punishment for growing output. The acute crisis in the Nigerian economy comes amid the fight against separatists and criminal groups in the delta of the great river as well as Boko haram, an ISIS* affiliate (*ISIS is a terrorist group banned in Russia).
They have also been lenient to Libya, de-facto split into two parts but demonstrating high output at some of its fields. OPEC has been soft on those of its members that are facing a national disaster despite incoming oil revenues, and this humane attitude is in line with philosophy perpetuated by the holy books of the Middle Ages.
Back in January, the White House communications service announced that the new president will revise the US energy policy. Trump’s ambitions were interpreted as isolationist efforts.
In particular, the new administration was seeking to lift any restrictions – be it regional and environmental – on output inside the US. As we know, Trump went even further in liberating American oil producers and energy companies by withdrawing from the Paris climate deal.
The January blueprint also looks to make sure the US will never again depend on OPEC (although it is known to be a group of countries. In plain language, it means that the Republican administration will no longer regard the oil alliance as a reputable high-profile international body. The US will not import oil from countries that pursue policies that might be considered harmful to the US, read the document.
It sent ripples across Gulf monarchies. At the Houston-based CERAWeek forum, Saudi Energy Minister Khalid Al-Falih made it clear that Riyadh had many grievances about the global oil market. It does not want to pay for the shale producers’ appetite with its output cuts. The US president softened his anti-OPEC rhetoric somewhat after the tour across the Middle East. But is it for long?
Regardless of whether the U-turn is genuine, the tension on the oil and gas transit routes in the Indian and Pacific oceans is a hard fact. It is no longer Somali-type piracy games. With an extra five billion in its budget, the DoD stepped up its presence in the narrow Strait of Hormuz. Now, on the other side of the planet, ISIS-linked* militants took control over part of Mindanao in the Philippines (*ISIS is a terrorist group banned in Russia). On his return from the Russian trip, President Duterte would like to rely on oil reserves to boost the nation’s defense budget. But neighboring China is already there setting up the artificial islands.
Washington does not even mull acting as a mediator instead sending its fleet to the troubled waters of the South China Sea. As for China, it is looking to secure oil and LNG imports from the Middle East and Africa in case of a major conflict using an unconventional option: it is building its first foreign base for its air force, navy and marines in the Arab region. It will be located on the Red Sea in Djibouti. Why knows, the Celestial Empire may indeed harbor such plans to ensure safe supplies for its energy sector which is extremely dependent on externalities. Drums are getting louder almost across the whole world.
…Whatever reservations you might have, there is no doubt that market benchmarks and constructive documents agreed by Russia and ten OPEC member states play a much more positive role in maintaining at least the minimum level of acceptable energy balance and security than directives, decrees and orders. Right?
Pavel Bogomolov, PhD, is an international expert on energy policy and diplomacy.