Saudis Play Hard to Get as Europe Seeks Alternative for Russian Oil

Gulf states could step in and increase petroleum production as the war wages in Ukraine, but OPEC politics and strained U.S. relations are proving to be major obstacles

David Rosenberg
David Rosenberg
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The Saudi Aramco logo is pictured at the oil facility in Abqaiq, Saudi Arabia.
The Saudi Aramco logo is pictured at the oil facility in Abqaiq, Saudi Arabia.Credit: MAXIM SHEMETOV/REUTERS
David Rosenberg
David Rosenberg

The key to Russia’s ability to fight a protracted war in Ukraine may lie some 3,000 kilometers away from the battlefields, in the Persian Gulf.

Despite the sanctions imposed on Russia since the invasion began in February, Europe continues to import some 3.5 million barrels a day of Russian petroleum and petroleum products. That’s pumping a critical $700 million into the beleaguered Russian economy daily and helping to sustain President Vladimir Putin’s war effort.

European leaders are determined to stop the imports by the end of the year. But they need to find alternative sources – and there is basically only one: The Persian Gulf, where Saudi Arabia and the United Arab Emirates alone could easily provide an extra 2.5 million barrels per day.

So far, though, the exporters are playing hard to get – they have either directly declined or not responded at all to appeals by Europe and the United States.

At its latest meeting on May 5, OPEC+ – an alliance of the Organization of the Petroleum Exporting Countries and a host of nonmembers, most prominently Russia – again decided against any significant increase in production.

Despite plunging Russian output and soaring prices for petroleum, delegates avoided any discussion at all about Russian sanctions and wrapped up their talks in a near-record time of just under 15 minutes, Reuters quoted sources present at the meeting as saying.

A 3D-printed oil pump jack is seen in front of displayed OPEC logo in this illustration picture.Credit: DADO RUVIC/REUTERS

“Through this whole crisis, there have been a lot of efforts, not just by Europe but by the U.S., to get OPEC to do more. But if you look at the OPEC minutes, they make vague references to geopolitics but say the fundamentals are fine – it’s like nothing is happening,” says Callum Macpherson, the London-based head of commodities at the South African bank Investec.

Behind the refusal to lend a hand to the West’s drive to pressure Moscow through its purse strings is a mix of internal OPEC+ politics and Saudi umbrage at Washington.

Critical ally

For the past several years, Russia has become a critical ally of OPEC and its efforts to control the global supply and price of oil. While its standing has been diminished by the war, which pushed production down by 10 percent in April and will probably cut it further over time, OPEC countries are looking to the postwar era where Russia is again a big exporter.

Russia and Saudi Arabia fought a bitter oil price war two years ago, which was finally brought to an end with an agreement on production quotas that remains in force till this day. The Saudis, OPEC’s dominant member, aren’t prepared for another dustup by pressing for higher quotas at Russia’s expense and alienating Moscow.

“It was a hard job to bring Russia in, and keep it in, and Russia’s membership may be needed again in future,” says Robin Mills, CEO of Dubai-based Qamar Energy in an email. “Nearly all members are out of spare capacity, so also have little incentive to approve higher production levels.”

Saudi Arabia has its own reasons for ignoring American and European appeals to boost production. Riyadh has been unhappy with the U.S.’ gradual disengagement from the Middle East under then-President Donald Trump and with President Joe Biden’s tough stance on Saudi human rights violations. It’s in no mood to help Washington oppose Moscow.

“The relations with Russia go much deeper than OPEC+,” says Macpherson. “The wider context goes back to Trump and his decision to reduce involvement and defense in support of its allies in the Gulf. Who’s going to step into that vacuum? Vladimir Putin. U.S.-Saudi relations haven’t gotten better under Biden because he keeps bringing up the killing of Khashoggi,” adds Macpherson, referring to the October 2018 murder of journalist Jamal Khashoggi by Saudi agents in Istanbul.

A Turkish police officer walking past a picture of slain Saudi journalist Jamal Khashoggi, near the Saudi Arabia consulate in Istanbul where he was murdered in October 2018.Credit: Lefteris Pitarakis/AP

Legislation now wending its way through the U.S. Congress that would subject OPEC to U.S. antitrust scrutiny is adding to bilateral tensions. A U.S. Senate committee passed a bill on Thursday, although the chances of its winning House and Senate approval remain slim despite growing anxiety in Washington about high gasoline prices driving inflation.

In the meantime, the Saudi and other Gulf oil exporters have benefited enormously from the market turmoil created by the war.

Oil prices have ranged between $98 and $130 a barrel since Russian troops entered Ukraine on February 24, up from an average of $71 last year.

Expecting prices to settle at about $107 a barrel this year, the International Monetary Fund last month raised GDP growth forecasts for the Gulf Cooperation Council countries, including Saudi Arabia, by 2.2 percentage points to 6.4 percent this year. Middle East oil exporters are expected to take in $818 billion in revenues this year, up by $320 billion from its prewar estimate, the IMF says.

Turning on the oil spigots, especially with Chinese demand falling, could reduce crude prices.

“The Saudis and other oil producers benefit too much to take any chance and change the status quo in the short term,” Adel Hamaizia, a visiting fellow at the Center for Middle Eastern Studies at Harvard University and a former economic adviser to the kingdom, told The Wall Street Journal earlier this month.

A woman riding an electric bike past a gas station as gasoline prices continues to climb close to record setting territory, in Encinitas, California, earlier this month.Credit: MIKE BLAKE/REUTERS

Surprise factor

Could Europe turn to other sources for oil? The answer is not really. U.S. producers are reluctant to step up output for fear oil prices won’t stay high long enough to justify the investment. Other exporters, such as Iraq, Libya, Nigeria and Venezuela, are contending with too many political upheavals to be considered reliable suppliers.

There’s also Iran, which could replace some Russian oil if Tehran can reach an agreement with the United States on reviving the 2015 nuclear accords, lifting sanctions.

“Since the Biden administration has come in, Iran has been raising exports because the administration has turned a blind eye. If an agreement were reached, they could increase production by 300,000 barrels by the end of the year,” says Neil Quilliam, senior research fellow at the Chatham House think tank’s Middle East and North Africa program.

“Iran is an important factor in this – it wouldn’t be a game-changer, but it could play an important role in this,” he says.

Europe still has time to sort out alternative sources of oil. The European Commission’s proposal would only ban imports of Russian crude oil by most member states six months after the measures are adopted and halt imports of refined oil products by the end of the year. The starting date may be delayed further due to stiff opposition that has emerged from Hungary.

Quilliam believes the Gulf will ultimately come through with more oil, though it might take until September – after the current OPEC+ quota agreement expires and there is more room for cartel members to maneuver.

The Emiratis have been unhappy with the ceiling imposed on them by the accord and are particularly keen to step up output, he says.

In a deal signed just weeks before the war began, Saudi Aramco agreed to take a stake in a Polish refinery and will provide almost half the country’s crude as well as oil to neighboring countries, Quilliam adds.

Still, he doesn’t see a dramatic turnout in policy. The Saudis “want to demonstrate market discipline and stick within the confines of the OPEC+ agreement,” he says.

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