Russia’s president says big oil nations – including Saudi Arabia – should freeze production to boost prices.
The Saudis promised closer co-operation, but ruled out production cuts for now. President Putin must have known he would get the brush-off. This isn’t really about the oil price. It’s about politics, and Russia buying influence in the Gulf.
In an already busy schedule, crammed with interfering in the USA presidential election and invading the territory of his neighbours, Russia’s strong-man president Vladimir Putin has found time to fix the oil industry’s problems.
Oil Prices & Putin
It is time, he thinks, to boost oil prices by capping production. He wants Russia and the nations in the Organisation of Petroleum Exporting Countries to stop producing too much oil until the rest of the world uses up more of the glut it currently enjoys.
“Every participant … that’s interested in maintaining stable and fair global energy prices will in the end make the necessary decision,” Mr Putin said in a lengthy interview with the news agency Bloomberg. “We believe this is the right decision for world energy.”
But not everyone in OPEC would have to freeze their output. Under the Russian plan, Iran would be allowed to continue to increase its production, as it emerges from the choke-hold of international sanctions.
“Iran is starting from a very low position,” Mr Putin told Bloomberg. “It would be unfair to leave it on this sanctioned level,” he continued.
Mr Putin was so seized with the importance of the plan, he took it from his interview in Vladivostok to the Chinese city of Hangzhou for the meeting of the G20, a combination of the world’s largest and emerging economies.
There, the strong man of Russia greeted the power behind the throne in Saudi Arabia; Mr Putin met Saudi Arabia’s Deputy Crown Price Mohammed bin Salman al Saud. Both sides announced they would co-operate to stabilise the oil market – a significant development in itself. But there was a distinct lack of detail on what they might actually do.
In any case, the historic co-operation didn’t last more than a few hours. Russia’s energy minister Alexander Novak said they had “a number of tools … for joint action.” Russian media – citing him as their source – reported that this included an output freeze of up to six months, to be agreed at the informal meeting of OPEC and other major oil producing nations in Algeria later this month.
Saudi Oil Minister Khalid Al Falih and Russian Counterpart Alexander Novak
Saudi Arabia didn’t seem to get the memo. The Kingdom’s oil chief Khalid al-Falih dismissed the need to cap production right now, saying “markets are trending in the right direction.” Meanwhile, officials from Iran’s oil industry – speaking in Singapore – talked about increasing their production still further.
Talk of a freeze in production is as much a nonsense now as it was when OPEC last failed to agree to it. Nations may applaud with the general principle – but sit on their hands when asked to do something about it. None of them want to lose cash or market share. There are too many conflicting interests for any deal – even if agreed – to be actually implemented.
A freeze would also be largely ineffective. OPEC production hit a record 33.69 billion barrels a day last month. Any deal to freeze – not to cut – production would simply prohibit any additional supply. It would lock in production at or close to those record highs, still leaving OPEC pumping more oil than the world needs.
Yet for some nations – even a freeze is too much. Oil production in Nigeria and Libya has been disrupted in recent months, by war and terrorism. If they are able to restore production, why would they turn their pumps off again voluntarily?
And even if there was a deal – and it was implemented – and it boosted oil prices temporarily – that would simply bring financial relief to America’s shale oil producers, make their production more economic and encourage them to squirt out some more black gold, limiting the scope for much higher prices in the longer term.
That’s the threat that Saudi Arabia has been trying to eliminate for years. The Kingdom’s entire production strategy has been to drive the US shale business to the wall. Why would it endure the economic pain that low oil prices brought – ballooning government borrowing, massive domestic spending cuts, rising political unrest – only to abandon the policy before the job is done?
President Putin is astute enough to know the Saudis aren’t yet ready to freeze their supply without all the other OPEC members doing the same. To do so would simply mean the Saudis losing market share without an iron guarantee of higher prices to make up the financial difference. And the Kingdom is certainly not willing to cede share to its regional enemy, Iran.
So what is Mr Putin’s game? He needs the money that higher oil prices would bring, of course, as Russia struggles with a deep recession. But I suspect he also wants to curry friendship and buy influence in a region where Russia’s motives have long been treated with suspicion, and where America has strong existing ties with one regional power (Saudi Arabia) and is starting to lay old emnities with another to rest (Iran). By showing sympathy with Saudi Arabia’s financial strain, and posing as Iran’s powerful new friend, President Putin is using oil for its most potent and selfish purpose – as a political weapon.