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Analysis

Minuet on Saudis, oil and Russia

by Darrell Delamaide

Minuet on Saudis, oil and Russia

The US, Russia and Saudi Arabia are engaged in an elaborate three-way minuet on oil prices, with implications for stability in the Middle East and relations between Washington and Moscow as well as the outcome of the November 2016 presidential election.

On balance, Democrat front-runner Hillary Clinton, who has broken her silence to reject the Alberta‒Nebraska Keystone XL oil pipeline and is taking a more hawkish line on the Middle East, seems to be aligning her policies increasingly with Riyadh. The longer the Republicans take in coalescing around a candidate with any coherent policy line, the likelier it is Clinton will win the Democratic nomination and next year’s election.

Saudi Arabia has embarked on a policy of maintaining full production, even amid falling oil prices, in part to discourage expensive shale oil production in the US. But it is also intent on maintaining market share against non-members of the Opec oil-exporting group – notably Russia – which are pursuing full production for their own ends.

Oil is, however, only part of the Saudi policy. The kingdom has repeatedly declared its intentions to build up energy capacity in solar and wind to reduce its own demands for oil, and it is maintaining investment at a high level.

Additionally, as the US under President Barack Obama pursues a policy of disen-gagement in the Middle East, Saudi Arabia has had to step up its own hard-power involvement to protect its interests in the region – particularly to block Iranian hegemony.

At the same time, it has opened channels of communication with Moscow. This is both because of the delicate state of the oil market and because of Russia’s renewed activity in the Middle East as it supports Syrian leader Bashar al-Assad with air strikes against the Islamic State movement.

Slowing demand
All of this is taking place against the background of slowing demand for oil from China and other emerging markets. Most experts are expecting oil prices to stay low or go even lower, at least in the short term.

Anticipation of renewed Iranian exports is weighing on prices, and shale oil production in the US is proving resilient. Inventories of crude continue to build up as production exceeds demand by some 2m bpd, and inventories of gasoline and other refined products will increase more rapidly as the maintenance season ends.

Market forces should compel principal actors in the oil market gradually to amend production to bring a market correction, but the Saudis seem unlikely to be the first to change their policy. They will continue to diversify their energy resources and their economy while exploiting their borrowing power in a low interest rate environment.

In the US, lenders will put more pressure on shale producers to curtail investment and idle production as prices remain low, even as US consumers happily take advantage of lower fuel prices to once again buy gas-guzzling cars and increase consumption.

Meanwhile, Obama's administration – increasingly gaining lame-duck status ‒ continues to pursue a somewhat undif-ferentiated energy policy, including its fossil-fuel tilt, as well as a cautious Middle East stance.

Hillary Clinton’s more energetic line seems likely to find favour in Riyadh. If she becomes president, she will be able to test directly with the Saudis how her policy works in practice.

Darrell Delamaide is a writer and editor based in Washington.

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