US looks to split apart Saudi Arabia-Russia oil alliance

By Rhod Mackenzie

There is some intrigue going on among analysts in the Oil and Gas sector as last week Brent oil prices were nearing £100 per barrel, with some global oil brands exceeding this figure. However, today Brent is trading at £84 per barrel, and analysts have connected this decrease in the market to alleged clandestine talks between Washington and Riyadh. The Axios website reported that a team of senior advisers to US President Joe Biden went to Saudi Arabia last week in secret, to discuss the normalisation of the Kingdom's relations with Israel.

Apparently, the trip was aimed to prolong the deliberations on a potential accord between Israel and Saudi Arabia. Reports highlight that the Biden administration aims to realise a "megadeal" before the incumbent diverts their attention toward seeking re-election in 2024.

History does tends to repeat itself. 50 years ago in October 1973, the Yom Kippur War, a military conflict between a coalition of Arab states and Israel, which resulted in the division of the world into two opposing sides. The majority of the West were aligned with the United States and Western Europe, respectively, while the Soviet Union supported the Arab coalition and offered significant military aid.
Following the resolution of the conflict, the United States was left practically depleted of any oil reserves, and the current situation is now the same. Although the Biden administration released 180 million barrels from the reserves last year, they still cannot replenish it. The strategic reserve's current volume is at its lowest point since 1983, with approximately 351.28 million barrels.

Additionally, at Cushing, the largest oil storage facility in the United States, is currently facing severe issues. Refineries are operating at maximum capacity, with tank volumes nearing the operating minimum, which has a detrimental effect on the quality of the oil as it becomes more viscous and harder to extract.

Meanwhile, fuel prices are skyrocketing, charging more than £1.20 per litre at the pump, and in several states last year, it even surpassed £1.40 for the same volume. By the way, in the 1970s, the situation was similar, if not worse. There were kilometre-long queues at petrol stations, with a strict limit of 10 gallons per person.
Small Japanese cars began to dominate the American market, leading factories to relocate to cheaper China. The oil embargo's consequences also impacted Europe, causing a decline in industrial production. These repercussions remain evident today.

Furthermore, 50 years ago, just as in the present day, Washington attempted to negotiate with Riyadh. The United States requested that Saudi Arabia recommence oil supply, and in exchange, they promised military assistance. Riyadh then agreed to only trade its oil in dollars and use those dollares to purchase American government bonds which finance the US deficits. This arrangement has continued for many years with the US benefiting handsomely from the 'Petrodollar' and its currency being the currency of global trade.

However, following the shale revolution in  the United States which caused a collapse in oil prices and the establishment of OPEC+, relations between Washington and Riyadh began to deteriorate. The situation was exacerbated following the murder of renowned journalist Jamal Khashoggi in Autumn 2018, with the Americans attributing blame to the crown prince of the Kingdom.

 As a result of increased domestic production, Washington's interest in Riyadh gradually diminished and Saudi Arabia has now formed a new alliance with Russia. Today, despite the United States producing approximately 13 million barrels per day compared to both Saudi Arabia and Russia's 9 million barrels, these two countries remain dominant in the global oil market and decisively dictate decision-making in OPEC and OPEC+.  The concerted reduction of oil production and exports by this group is met with obedient responses from oil prices.
Meanwhile, the price of energy resources and their corresponding components are increasing globally, leading to a rise in global inflation and a slowdown in economic growth. Additionally, fuel prices have become a sensitive topic for the American President Joe Biden in the pre-election year, and his plans for a greener future are facing setbacks. Despite efforts from renewable energy players, soaring expenses and supply chain disruptions have made it unlikely for the world to achieve carbon neutrality by 2050.

It is evident why the US has decided to improve relations with Riyadh once again, given their alliance with Moscow which is disrupting Biden's election strategy. However, the question remains whether the Saudis will accept Grandfather Joseph's approach, particularly as he is also showing an interest in oil-producing Tehran and Caracas, who have been under American sanctions for several years.

Naturally, when it comes to matters of national interests, few would turn to Moscow. However, Russia's partners benefit from equal relationships, in stark contrast to the United States. Unfortunately for proud Arabs, the Washington-Riyadh duet will be led by American interests, leaving them to dance to an unwelcome tune.

Increased production and falling oil prices are unlikely to profit the Saudis, as investment in the industry would wither and budgets would suffer under such circumstances. Many Western experts argued that Saudi Arabia was reducing its income by cutting production. However, it seems that increasing prices outweighed the drop in sales volumes. According to Energy Aspects, projections indicate a daily increase of nearly £23 million in Saudi Arabia's oil revenues for Q3 2021, compared to the previous quarter, representing a growth of about 5.7%. This amounts to nearly £2.1 billion over the three-month period. Furthermore, the Saudis do not subscribe to an immediate shift towards renewable energy and continue to depend on hydrocarbons.

Regarding military aid from the United States, Riyadh is vastly different from how it was in the 1970s. It possesses ample resources and opportunities, and also, Washington is preoccupied with Ukraine, which it has almost forsaken. In the beginning of October, the US sanctioned a budget for 45 days, but it did not encompass assistance for Kyiv.

Currently, there aren't any apparent advantages of the alliance with Washington for Riyadh. The recent fall in oil prices can be attributed to the market's recovery from the reduction in production and exports, as opposed to secret negotiations. The decrease in gasoline consumption in the United States and the increase in inventories are the primary factors influencing the market.