The Organization of the Petroleum Exporting Countries (OPEC) is no longer what it used to be. It is slowly losing its power because the global price maker of oil—the non-OPEC oil producer, the U.S. shale oil industry—has become competitive enough to disrupt OPEC’s dominance in the world’s oil markets.
OPEC’s ability to exert power now hinges on partnering with new countries to help serve as a counterweight not only to U.S. oil production, but also to the increasingly hostile rhetoric of the American President Donald Trump. President Trump has repeatedly called on the oil cartel, namely Saudi Arabia, the leader of the 14-member organization, to pump more oil to maintain lower prices—an issue that many observers see as important for his re-election in 2020. He demanded that Saudi Arabia must increase oil output if it wants to keep receiving the U.S. military support in its clash for regional dominance with Iran. Scarred from U.S. political pressure and the growing American oil market share, Saudi Arabia has been pushing for a bigger OPEC, which, by bringing more oil-producing countries on board, it thinks will continue to matter by maintaining the cartel’s impact on global oil prices.
Russia and OPEC have now completely reset their relations.
One of OPEC’s close partners now is Russia, which has been rubbing elbows with the world’s major oil producers for more than three years. Both sides tried to make an agreement to reduce oil production in 2001. But Russia failed to live up to its end of the deal. Instead of cutting oil production, it increased it. It seemed that that breach of trust would give a fatal blow to any future cooperation. Further attempts to resume cooperation proved unsuccessful—until recently. Russia and OPEC have now completely reset their relations.
Spearheaded by OPEC’s leader Saudi Arabia, Russia’s President Vladimir and Saudi Crown Prince Mohammed bin Salman signed a charter in Riyadh on October 14, 2019, providing for long-term cooperation with OPEC+. This expanded group includes non-OPEC countries Kazakhstan, Azerbaijan, Bahrain, Brunei, Mexico, South Sudan, Sudan, Malaysia, and Oman. Their new alliance reportedly aims to advance a “better understanding of energy market fundamentals and a permanent dialogue among oil producing countries.”
OPEC and Russia have been cutting oil production in tandem to bump up global oil prices since 2017, which has predictably drawn fire from President Trump. The push for formalizing the alliance was the U.S. anti-cartel legislation aptly titled NOPEC (No Oil Producing and Exporting Cartels Act), which passed in the U.S. Congress in early February this year. As the name of the law shows, it targets OPEC.
Building close relations with Saudi Arabia helps President Putin add a new dimension to his growing influence in the Middle East.
The OPEC-Russia alliance has served not only the oil interests of Saudi Arabia and Russia. It has elevated the overall relations between these two countries to a new level. President Putin signed a number of economic and trade agreements with MbS during his visit to Riyadh this October. Cooperation with Saudi Arabia and OPEC strengthens Russia’s ability to exert pressure on Middle Eastern countries to protect its strategic, political, and economic interests in the region. Building close relations with Saudi Arabia helps President Putin add a new dimension to his growing influence in the Middle East, which is already strong in Syria, Egypt, and Libya. He has also been cultivating good relations with Turkey and Iran.
But Russia’s partnership with OPEC is not guaranteed. There are some inherent disagreements and tensions under the surface between the two. Russia’s status in the organization could be diminished if it fails to stick to production cut agreements or if it is not able to reach a consensus on oil price benchmarks. Both are realistic scenarios.
Because it is not an official member of OPEC and has no plans to join it, which President Putin made clear at a press-conference in Saint Petersburg in June, Moscow does not have to abide by its rules. While Russia is happy to be part of the group that dictates global prices of oil, it looks at the cartel pragmatically. If President Putin feels that the Russian economy is weakening, he may very well decide to take advantage of the production cuts in OPEC and increase his country’s oil output to rake in more cash at OPEC’s expense. While OPEC knows that it could happen, it does not seem to be disturbed by it, or, at least, not yet.
Some Russians, including the country’s major oil company Rosneft, are uneasy about Moscow’s long-term alliance with OPEC. They fear that an extended agreement to keep oil prices down will artificially depress the development of the Russian oil potential. They think that it will only play into the hands of the ever-expanding American shale oil industry.
OPEC and Russia have also had disagreements on oil pricing thresholds. Russia is quite comfortable with prices of oil at $45 per barrel to maintain a healthy budget, even under the American economic sanctions imposed in the wake of Russia’s annexation of Crimea in 2014. Its economy is more diverse than those of heavily oil-dependent Saudi Arabia and other countries in OPEC, which need a higher price of $80 to keep themselves afloat.
Russia is the world’s largest exporter of oil after Saudi Arabia and the U.S.
The current Brent benchmark, a global crude oil pricing system that covers the Atlantic region, is $62.54 per barrel. The unwillingness of Russia to more aggressively pursue production cuts and higher oil prices has rattled some OPEC members. Under the current economic reality, the oil cartel seems to need Russia more to stay relevant than the other way around. Russia’s decision to increase or cut its oil production matters to OPEC. After all, Russia is the world’s largest exporter of oil after Saudi Arabia and the U.S.
Russia’s growing clout in OPEC since 2017 has been far from smooth. In fact, it has caused discord and tension within the organization. A dispute over Saudi Arabia’s decision to postpone an OPEC meeting planned for this June in Vienna, Austria, to accommodate the busy schedule of the Russian oil minister Alexander Novak drew complaints from many member-countries about the oversized influence that Russia now commands in it without even being a member. Later, President Putin’s announcement about an extension of oil production cuts this July before OPEC members had even met to agree on it further fueled the simmering anger.
But despite the discontent over Russia’s new role in OPEC, its members are unlikely to reach an agreement on production cuts without Moscow’s participation. As a dominant member that drives the organization, Saudi Arabia considers Russia an important energy and political power that it needs to advance its own and OPEC’s interests. The rest of the members may eventually get in line, as they have done so far, albeit sometimes begrudgingly. But Russia’s puissance is now a new reality.