Posted on 09/27/2003 2:10:53 PM PDT by Lessismore
Russia challenging Saudi Arabia’s dominance in world energy market
Oil will be high on the agenda at Russian President Vladimir Putin’s weekend summit meeting with George W. Bush at Camp David Russian oil for US consumers, to reduce dependence on Saudi Arabia. Across the globe in Beijing, Putin’s prime minister, Mikhail Kasyanov, this week haggled with his Chinese counterpart, Wen Jaibao, on building a 2,400-kilometer, $2.5 billion oil pipeline from Siberia to China, which is crying out for energy to fuel its burgeoning economy. Saudi oil may be far cheaper to produce, but a steady supply from Russia is desirable.
Russia is challenging Saudi Arabia’s long-held dominance of the world energy market, a challenge that has taken on added weight as Riyadh’s estrangement from its ally, the United States, deepens in the aftermath of Sept. 11, 2001.
Earlier this month, Putin hosted Saudi Arabia’s de facto ruler, Crown Prince Abdullah, in Moscow for a landmark visit in which oil was a key topic. Abdullah’s three-day visit was the first to Moscow by a Saudi leader since 1926, when the Soviets were the first to recognize the kingdom of Abdel-Aziz, Abdullah’s father, and indicated moves toward a strategic realignment by the world’s two top oil producers after decades of hostility and distrust.
The Saudis, watching their relationship with the US crumbling almost by the day, are seeking to offset this by improving their ties to Moscow. But this is an effort born of the kingdom’s growing sense of insecurity. One reason is its desire to limit its exposure regarding Osama bin Laden and support for Islamist organizations. “Saudi Arabia is a country, it seems, on the verge of being a social outcast,” observed Professor Vladimir Isayev, deputy director of the Institute of Oriental Studies in Moscow, shortly before Abdullah arrived in the Russian capital. But arguably a more pressing reason is Russia’s emergence as a major rival to the kingdom in the oil industry outside the Organization of Petroleum Exporting Countries, which the Saudis dominate. Saudi Arabia’s economy depends almost entirely on oil exports. The kingdom’s leadership repeatedly put off introducing economic reforms, such as privatization, to diversify the economy over the years and is only now seriously addressing that problem. So, burdened with a heavy national debt, it cannot afford to see its share of the market jeopardized by Russia. It is significant that it was the Saudis, Oil Minister Ali al-Naimi in particular, who initiated Abdullah’s visit to Moscow.
Russia’s oil production is soaring for the fifth straight year 11 percent so far this year alone. It is now pumping some 8.3 million barrels a day, against Saudi Arabia’s 8.7 million, making it the biggest producer outside OPEC. Moscow has repeatedly offered its oil as an alternative to OPEC’s. That has struck a chord with the Bush administration, which wants to reduce as far as it can its reliance on Gulf oil and is seeking out alternative sources of supply from the Arctic to West Africa.
In Moscow, the two parties signed a five-year accord to cooperate on keeping oil prices stable, which will no doubt help both to keep prices at a level desirable by Riyadh and Moscow. Indeed, if the world’s two largest oil producers could set aside their very substantial economic, political and military differences they would together be a force to be reckoned with. But despite the groundbreaking summit in Moscow, those differences remain and it therefore must be questionable whether this apparent rapprochement will endure.
Russia and Saudi Arabia have been locked in a contest for energy dominance for several years, but the events of Sept. 11, 2001, “provided Moscow with a chance to displace OPEC as the key energy supplier to the West,” according to US analysts Edward L. Morse and James Richard. Writing in the journal Foreign Policy recently, they predicted that the battle will continue and “will have fundamental consequences for the world’s economy, US energy security, Russia’s global role, the future relevance of Saudi Arabia, and the clout of OPEC. The only oil not threatened by Russia’s rise is the petroleum developed by international companies outside of the key OPEC countries of the Middle East.” For which read Saudi Arabia and the Gulf producers.
Oil industry analysts believe that Russia will pay little more than lip service to maintaining price stability. “Russia doesn’t really have interest in limiting its production,” says Julian Lee, senior energy analyst at the Center for Global Energy Studies in Britain.
Moscow agreed in 1998 to work with OPEC to curb oil production, but has boosted its output by 50 percent in that period. Moscow agreed to cartel requests to reduce supplies in the first half of 2002, but them maintained its output at full blast and once the deal expired in July 2002, pushed up production even further. Russians have not forgotten how in 1985 Saudi Arabia used its excess production capacity to flood the market and drive down oil prices to a paltry $12 a barrel, which wrecked any hopes that the then Soviet Union had of an economic revival and contributed to the collapse of communism soon after.
Russia has increased its oil exports to the US over the last year or so, from 1.3 percent to 4 percent of US imports. That is expected to triple in the next few years. In October 2002, Putin and Bush held their first energy summit. The second was held in St. Petersburg earlier this week, with both sides “committed to the expansion of Russia’s energy export capacity.”
A key element in this new era of energy cooperation will be major investment in Russia’s oil industry by US companies, something they cannot do in Saudi Arabia, which nationalized its oil industry in 1975 and booted out the Americans. Riyadh’s refusal to allow foreigners any participation in the Saudi oil industry could well curb possible Russian investment as well.
No doubt, both Russia and Saudi Arabia will benefit from the cooperation agreement on pricing, but Russia, whose influence over the global oil market has risen dramatically over the last two or three years, clearly gained the most from this detente. Its economic power has been recognized and thus will be enhanced, particularly in relation to Kazakhstan and Azerbaijan, potential rivals to both Russia and Saudi Arabia alike, and in dealings with the US.
The Caspian Sea producers, courted by the US to keep them out of the Russian and Iranian orbits, could find themselves in a tight squeeze if the two titans of the oil industry work together to limit oil production to bolster prices. It remains to be seen just how far they will act in tandem on that, since Russia’s drive to open up the US and Asian markets inevitably will erode Saudi Arabia’s exports there.
On the political level, the Russians won Saudi support for their war against Islamic separatist rebels in Chechnya. Moscow has long accused the Saudis of being an ideological and financial supporter of the Chechen rebels, who adhere like the majority of Saudis to the Wahhabi branch of Sunni Islam. With assurances from Saudi Arabia, which considers itself the beacon of the Islamic world, that this is no longer the case (no doubt a consequence of the surge of Al-Qaeda attacks inside the kingdom in recent months), and acknowledgment that the Chechen insurgency is a purely Russian internal affair, Putin gets far greater freedom of maneuver in Chechnya because Islamic criticism of Moscow will be muted.
Putin also won Saudi support for Russia joining the Organization of Islamic Conference, the 59-nation umbrella body for the world’s 1 billion Muslims. Technically, Russia is not eligible for membership because its 20 million Muslims account for less than 25 percent of its population. But Moscow is hoping that with the backing of the kingdom, a major benefactor in the Islamic world and a founding member of the OIC, it may be able to wangle its way in. That would be disastrous for the Chechen rebels since Russia would be able to speak with the force of global Islam. Choking off the Chechen violence would greatly enhance the Putin administration’s prospects in parliamentary elections scheduled for December and presidential elections next March.
The Saudis and Russians are both unhappy about the US conquest of Iraq and how that affected their positions in the Gulf. Both want to counter this as much as they can. US control of Iraq’s oil wealth, currently second only to Saudi Arabia’s but potentially much greater, affects both Riyadh and Moscow.
For the Saudis, and OPEC, that is a threat to their power in the oil market. The Americans have long wanted to undermine OPEC and splitting Iraq from OPEC would seriously weaken damage the influence that the cartel, and Saudi Arabia, wield in controlling prices. Some energy experts believe that once Iraq’s dilapidated oil industry is refurbished and modernized, it could be producing 5 million-6 million barrels a day, far higher than its pre-1990 levels. That would be a serious problem for the Saudis and OPEC, if Baghdad quits the cartel.
As for Russia, its oil companies conducted a brisk business with Iraq under the UN-sponsored oil-for-food program during 12 years of economic sanctions, as much as $1 billion a year. It may also find that the lucrative contracts it signed with Saddam Hussein’s regime are no longer recognized and that it could be cut out of new deals signed with the post-Saddam government. It also risks having the $9 billion debt owed by Saddam’s regime scrapped.
Putin could eliminate these problems by securing Bush’s pledge to ensure that Russia, a non-OPEC player, will not be cut out of the potential bonanza in Iraq, which could lessen Russian enthusiasm for a full-blown partnership with Riyadh.
Ed Blanche, a member of the International Institute for Strategic Studies in London, has covered Middle Eastern affairs for many years and is a regular contributor to The Daily Star
The Russians will appreciate the money, we will appreciate the oil.
I hope it happens and that the Saudis remember their glory days when they are trying to eat sand.....
Tia
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