Foreign policy is generally a pretty staid business. Things move slowly and cautiously because a lot is at stake, and rash moves can have huge repercussions. Some, however, utilize that cautiousness for tactical advantage, and two of the very best have now teamed up.
Of all the instability in the world, you’d think the poster child would be Donald “The Walking Force Majeure” Trump, but his ability to fully flex his considerable craziness is marginally (but effectively) restrained by the US political system. It is true that if one of his madcap diplomatic forays goes sideways there could be major consequences, but that is unlikely now that even little rocket man (I’m not sure if that’s capitalized) is suddenly trying to act like more of a diplomat. What should concern us is the relationship and tactics of those who now pull global oil market levers (and the US does not, ten thousand headlines to the contrary).
Should anyone conclude that with the world’s two largest producers joining forces there is a firm hand at the wheel, they should think again. Let’s start with Russia. Remember the 2014 Sochi Winter Olympics? Putin spent $50 billion to orchestrate a global display of the “New Russia.” The Winter Olympics were, according to Russia’s deputy prime minister Dmitry Kozak, “smiley faces, Sochi’s warm sunshine and the glow of the Olympic gold have melted the ice of scepticism about the new Russia.”
Twenty-three days later, Russia invaded and annexed Crimea. The New Russia is apparently much like the Old Russia, except with mascots. And inside the mascots might well be elite Russian special forces personnel who could slit your throat with the swipe of a giant pink furry paw. I could not be less interested in the gyrations that led to Crimea’s significance; what’s amazing is that Russia would spend tens of billions to prove a point, and then within a month entirely negate the effort, like saving for a Ferrari for 10 years then celebrating your first day of ownership by filling it with manure.
The other half of the team is somewhat different, thank heavens. Saudi Arabia is, to their credit, moving in a positive direction by clearing out decades of calcified attitudes and power structures. But make no mistake as to how destabilizing this is as well. While not as openly comical as Russia’s bizarrely brazen lies and “who, me?” propagandized and ludicrously feigned innocence, Saudi Arabia’s new direction is creating shock waves around the world.
Cataloging what they’ve been up to recently is a sobering experience. Economically, the country is about to privatize the largest and most valuable oil company in the world, and the privatization will for the first time open a view into the country’s real petroleum reserves (as opposed to the unverifiable figures they’ve thrown around for decades). Saudi Arabia is cracking down on a corrupt ruling elite, loosening its cultural straitjacket by for example allowing women to drive, building tens of billions worth of nuclear reactors, planning a $500 billion revolutionary city, picking serious fights with Middle East neighbours like Qatar, etc. They have stopped crowing about the millions of barrels of excess daily production capacity they have, and begun acting like they want nothing to do with oil.
For now, they do though, and their recent alliance with the world’s most dangerous goofball is expedient but disturbing. What the odd couple has in common these days is a desire for higher oil prices. The world’s media got swept up in the collaborative feel-good story, despite it being like a news report about a donkey falling in love with a Volkswagen. You kind of feel happy that he’s happy, but the net effect is just unsettling.
Even the basis for their alliance is fraudulent, an aspect that the world’s media implausibly missed. Crude oil prices have been rising since early in 2017 when the two announced plans to support oil prices by reducing production. This being a complicated task, and these two being masterful poker players, it took many months to put the pieces into place. What that means is that they took steps to ensure they would suffer no harm, despite appearances. Check out what those two were up to in the months before “slashing production” in an attempt to raise prices:
Saudi Arabia, an old hand at this game, cranked up their production back in early 2015 in preparation for the day when they would swoop in and slash it in a grand gesture that the media always goes for like fresh strawberries. Russia, though an absolute master of media manipulation, was new to this game and thus their production positioning was more clumsy and transparent. They hiked theirs substantially in late 2016, shortly before coming out in support of the Saudi/OPEC plan and announcing their grand announcement.
It’s obvious of course that the production cuts are a farce; both ramped up production solely in order to subsequently cut it. They both produce more now than when oil prices crashed in late 2014. It makes no sense to say that they increased production to increase revenues; the price was in the toilet when that happened so that would have been quite ineffective.
As another interesting chart shows, on two different scales, Saudi Arabia’s production and the combined production of SA and Russia:
The gap between the lines in 2017 figuratively represents Russia’s contribution to the cuts. In other words, this whole shtick is SA’s baby. Russia’s cooperation was critical in one aspect – to have a unified story to spoon feed the world’s media. They are well aware that the information tide never has time or inclination to go back and see if these things really happened or not. There will always be a new shiny object du jour.
One thing should be apparent though: if they ever decided to get serious, the two pranksters could get together and actually remove several million barrels per day from production. Or three. The world believes differently, again thanks to a less than astute media stream; and also believes that US shale can/will flood the markets at the slightest sign of price increases. If these two removed 2-3 million b/d, the response from US shale producers would be hopelessly inadequate to cover even a quarter of that within any short to medium time frame.
That global markets see no reason to price in a “risk premium” on the price of oil simply beggars belief. The existence of that odd phenomenon can be laid at the feet of the US shale fan club, who have convinced the world that their 5 million barrel per day pot is all that matters in a 100 million barrel per day world. That deranged conclusion in itself should be cause for alarm, but in the endless wave of sycophantic headlines, no one notices or cares. Black Swan, anyone?
Read more insightful analysis from Terry Etam here. To reach Terry, click here