Geopolitics of Oil

Dr. Gawdat Bahgat, NESA Center

Last week, Saudi Arabia, Russia and the United States led a multinational coalition in major oil production cuts, the largest in world’s history, after a drop in demand due to the Coronavirus crisis and a Saudi-Russian feud devastated oil prices. Twenty three countries committed to withhold collectively 9.7 million barrels a day of oil from global markets. Other producers such as the United States, Canada, Mexico, Brazil and Norway, have also pledged to cut production. The deal was sealed after long negotiation between all parties and several telephone calls between President Trump and both the Saudi Crown Prince Mohammad bin-Salman and the Russian President Vladimir Putin. The United States had never been so active and so involved in forging a pact like this. Still the cuts might not be enough to support higher prices in the coming weeks as world-wide lockdown have pummeled demand for gasoline, diesel and jet fuel.

Two conclusions can be drawn from the process of negotiating and signing the deal. First, major oil producers and consumers worked hand-in-hand to reach an agreement to stabilize global oil markets. In most of the second half of the twentieth century they were competing against each other. In 1960, Iran, Iraq, Saudi Arabia, Kuwait and Venezuela founded the Organization of Petroleum Exporting Countries (OPEC) and other producers joined the organization in the following years. The goal was, and still is, to get what the members perceive as a “fairer” price. In other words, major oil producers wanted a higher price for crude and petroleum products. The opportunity came shortly after the 1973 Arab-Israeli war, when Arab oil producers cut production and were able to raise prices. This is known in oil industry as the first oil shock. In response, the United States led major oil consumers to create the International Energy Agency (IEA) in 1973-74. The goal was to keep prices down. Stated differently, OPEC and the IEA had opposite goals and worked against each other in most of the 1970s, 1980s and early 1990s. Now, both organizations (i.e. producers and consumers) have come to the conclusion that stable prices at a reasonable level are in everybody’s interest.

Second, many countries in NESA region (and elsewhere) are heavily dependent on oil revenues. The severe fluctuation in oil prices makes it hard to make any long-term plans. Most oil producers, if not all, have been talking about diversifying their economies and reducing their vulnerability to price fluctuation. Despite sincere efforts and a few successful cases, most oil producers have a long way to go in order to create other sources of national income. The current crisis should serve as a wake-up call and help them to further intensify their diversification efforts.

The views presented in this article are those of the author and do not necessarily represent the views of Department of Defense, the NESA Center or any of United States government components.