Russia and Saudi Arabia Stabilizing the Oil Market: A Prisoner’s Dilemma?

by Daniel Tsvetanov

During the G20 summit in Hangzhou, China, the Russian Energy Minister Alexander Novak and the Saudi Arabia Minister of Energy, Industry and Natural Resources Khalid bin Abdulaziz Al Falih signed a joint declaration for the stabilization of the oil market. Novak and Al Falih agreed on joint measures and steps, recognizing the output freeze as the most important and effective measure. After this message Brent crude from the North Sea for November delivery rose by 5.4% to 49.15 dollars per barrel.

The deal has quickly received an evaluation of a ‘historical step’, because it would be the first instance of cooperation between an OPEC and Russia in the past 15 years. Since 2014, a period in which oil price has fallen by more than 40%. Back in 2014, Saudi Arabia decided to abstain from any actions influencing the oil price, largely striving to expand its market share in various regions and allow extra stress on the US shale oil industry.

However, as of today, Saudi Arabia begins to struggle with low oil prices and budget deficits. Riyadh’s oil provides 70% of the government revenues and 90% of the exports. Government revenues fell by 23% last year, and the Kingdom cannot afford to continue its predatory pricing policy. One sign of the Saudi’s economic problems is their first international debt issuance in 25 years, which is expected to be signed before the end of April 2017. Saudi Arabia is now willing to cooperate with Russia, its market rival, in order to raise oil prices.

However, it is hard to predict whether the agreement will be followed by actual steps. Production volumes are yet to be decided during the XV International Energy Forum in Algeria later this September. OPEC and non-OPEC member countries have to resolve a ‘prisoner’s dilemma’.

Indeed, there is no assurance that the ‘historical agreement’ will be followed by ‘historical action’. Previous attempt towards stabilization of the oil market was undertaken in spring, and it was a failure. Saudi Arabia rejected to sign any agreement without the participation of Iran. Teheran in the meantime seeks to recover and boost exports that have been restrained by Western sanctions. Iran reported that after the removal of the sanctions it increased exports to almost nearly 2 million barrels per day and it is ready to freeze production only after reaching the volume of 4 million barrels per day.

Some experts may argue that the agreement between Moscow and Riyadh is just a speculation. Freezing of quotas can only provide some short-term effect, if it can provide some at all. And the player that can undermine this effect is a small producer in the US. Not one, but thousands of them. Thanks to the boom in shale oil production, the United States has witnessed more growth in daily output than any other major producer. OPEC raised its forecast of oil supplies from non-member countries in 2017, as new fields come online and U.S. shale drillers prove more resilient than expected to cheap crude, pointing to a larger surplus in the market next year.

There are more prisoners in this dilemma than just Moscow and Riyadh.

One comment

  1. I think this is historical and it will set up good relationship between two nation.


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