Daniel H. Yergin (The Prize) had rightly said, “Sovereignty and national survival and not merely the price of oil were at stake.” The COVID-19 pandemic has been instrumental in receding oil demand due to wide-range of restrictions impeding oil-driven consumption activities. This essentially impacted the prices of oil necessitating OPEC+ (thirteen members of Organization of the Petroleum Exporting Countries and ten non-members of OPEC) led by Saudi Arabia and Russia to cooperate on production cuts. However Russia’s refusal to join the bandwagon with Saudi Arabia ensued a price war depreciating oil prices in months of March and April 2020.
The ensuing OPEC+ agreement signed on 12th April 2020 under the aegis of United States of America (USA) was embraced to stabilize the inelastic element of their critical commodity (oil) as the oil supply gut created by Saudi Arabia’s price-war rendered their vital product as a Giffen good temporarily. The COVID-19 pandemic thus ushered in a theatre for sustainability politics to stabilize oil market prices in the upcoming months setting the benchmark for cooperation in a competitive oil market. The article seeks to unfold the dynamics of international political economy through the energy policies of the three major competitive players viz Saudi Arabia, Russia and USA.
Geostrategies employed by Saudi Arabia:
From enhancing stakes in European oil majors such as Eni, Shell, Repsol to capitalize upon European markets to offering discounts in market prices and extended payment options (April-May) while hiking July and August prices for Asian markets albeit maintaining European market prices showcases Saudi Arabia’s hawkish policies to retain market share. Further, downstream investments in China and India enable it to increase its foothold in the region. Saudi Arabia’s booking of Egypt’s storage facilities in March 2020 to owning one in every ten VLCC (very large crude carriers), Saudi Arabia was successfully able to tide over the storage scepticism crisis hitting the industry during the supply glut saga.
USD seven billion bond issue enabled USD fifty-four billion oversubscription during April 2020, showcasing investors innate trust in the country’s policies. Investments by the country’s Public Investment Fund attributed its oil diversification strategies to sustain its oil-dependent economy through the pandemic given its imprudent price war with Russia. Saudi Arabia’s price-war policies aimed at destabilizing USA’s shale industry has in fact enhanced latter’s resilience to price shocks, thereby depreciating bilateral relations to a state of flux while inevitably sustaining a temporary truce amidst suspicious relations with Russia given the waning geo-political benefits of OPEC+.
Geostrategies employed by Russia:
Russia sustained the supply overhang by capitalizing upon its alliance with China, the world’s largest energy consumer by increasing its supply margins, replacing Saudi Arabia as China’s top supplier. Meanwhile, termination of Rosneft’s operations in Venezuela against the backdrop of pandemic diplomacy to USA showcases Russia’s strategy in ascertaining USA’s compliance with OPEC+ aspirations for stable prices after scathing the US shale industry through Saudi Arabia’s malfunctioned supply. The reserves from its national welfare fund have successfully helped Russia battle the crisis, however, weakened oil prices have not denounced its ambitions to diversify its revenues. This is evident from its tenacious operations on Nord stream two, completion of nuclear reactors in Finland and Hungary and nuclear plant construction in Egypt.
Russia has also been testing its year-round capabilities of undertaking shorter voyages to Asian markets by successfully steering its flagship voyage carrying liquefied natural gas supplies to China via the Northern Sea route. Hence, Russia’s engagements with nuclear icebreakers redirects to its draft geostrategy that calls for an extended customer base in Asia. Russian oil companies lockstep with OPEC+ production cuts scheduled at 18-20% capacity (20-23% capacity under the OPEC+ deal) shows its keenness for stable prices and avoidance of production overhang. Russia also seeks to compete with Saudi Arabia in the Indian market through competitive agreements utilizing its lower fiscal breakeven and downstream investments in India, which is evident from reduced production cuts beginning from August 2020.
Geostrategies employed by USA:
USA has aggressively sought to protect its blooming oil industry post West Texas Intermediate (WTI) crash forcing officials from Texas Railroad Commission, Oklahoma to major US oil companies to curtail production, operating costs and capital expenditures. USA’s energy department amid storage space scepticism had resorted to its strategic reserves coupled with royalty reliefs for companies using federal land. Pandemic induced bankruptcy in the sector was actively sought to be mitigated through USD 500 billion Congress aid and Federal Reserve assistance for smaller players. USA’s offer to provide domestic storage for the oil purchased has lured allies such as Australia and India to purchase crude form USA. Thus, USA being a relatively new player in the industry is facing stiff competition from the state-backed oil majors and has resorted to aggressively protect its struggling fossil fuel industry.
This explains staggered investments by the United States Oil Fund LP in future contracts and extended investments in other oil-linked assets underlining prudency for solvency in the industry. At the same time, USA’s silent agreement towards production cuts concurs with storage capacity as Saudi Arabian tankers discharged their cargo by May 2020. Also, tweets calling for action against Iranian gun boats harassing USA’s ships and sanctions on Iranian ships for aiding Venezuela showcases USA government’s attempts to rally oil prices by amplifying geo-political tensions. As USA battles further wave of infections, less number of functioning rigs albeit some private producers increasing their oil production showcases financial stress on the industry against the backdrop of competition from their peers.
Analysis of geostrategies employed by Saudi Arabia, Russia and USA:
Hence, through the prism of state-centred approach to trade and politics, mercantilist tendencies are evident from the energy policies of Saudi Arabia, Russia and USA validating their need to protect their critical industries while moving beyond interest-group demands. As oil prices rallied lightly with OPEC+ production cuts in May 2020, it instigated them to ensue protracted uniform cuts till July 2020. In Saudi Arabia’s case, the energy industry is a dominant contributor to its national income as compared to Russia that enjoys backing from its defence and agricultural sectors to a certain extent. However, the energy companies of both Saudi Arabia and Russia align with their respective national policies while market dynamics play a significant role in USA. This is evident from their attractive pricing mechanisms and storage capacity mechanisms. The asymmetrical market competition between the major players of OPEC+ and USA has threatened the latter’s survival in an artificial market spearheading USA to clamp down production.
The International Energy Association has estimated a decline in energy demand to 25% per week (countries in full lockdown) and weekly average of 18% (countries in partial lockdown). As China remains as a potential export market vis-à-vis USA and India, significant market competition by both Saudi Arabia and Russia is expected. The oil supply gut had prompted Asian consumers to hoard their strategic product resulting in adequate strategic reserves. This has affected the strategy of the major players in terms of monitoring the production cuts to stabilize market prices. Thus, Saudi Arabia and USA’s strategy has been driven towards ending their voluntary production cuts and rallying market demand instead of market prices. Russia’s market management towards demand-capitalization has been smart, evident from it being a top exporter to China replacing Saudi Arabia, thereby disabling the price scramble unleashed by Saudi Arabia’s price war. While Russia’s instrumentality towards ensuring prudent due diligence of OPEC+ agreements has been commendable, it has enabled Russia to strategize for the long-term upheaval as Europe shuns Russia’s Urals crude owing to higher prices to protect its vital industry that contributes about forty percent to the state’s revenues.
As travel bubbles resume in a staggered manner in Europe and Asia (July 2020) the oil market remains tight amidst second wave of infections. Meanwhile, the peak demand theory gathers steam as major consumers like China ban single use plastics by 2020 and India bids for solar projects and natural gas contracts to decrease its dependence on fossil fuels. The absence of a confirmed vaccine amidst weak oil demand recovery in major markets, the resilience of OPEC+ players is being tested as they compete with non-OPEC players who are not bound by institutional arrangements. Thus, geo-political concessions focused on the solvency of their crucial industry have enabled the major players to cooperate while channelling their distrust towards conquering the market pie of their competitors. Hence, as the major players constructively look for oil-diversification as part of their geostrategy, their fear of ‘market absence’ hinders vulnerable players like Libya, Nigeria, Iraq, Iran and Venezuela to sustain in an acutely displaced industry harbouring high competition.
Aneetta Thomas Peedikayil is a budding lawyer with a keen interest in international affairs currently pursuing M.A (International Studies), Christ University, Bengaluru, India. An ardent liberalist with research interests in energy economics, geopolitics and international law owing to internship experiences with Greenpeace, The Hindu (9 by-lines published) and Centre for WTO studies (Ministry of commerce and Industry, India).