Petroleum analytics has its own theorems that would seem to have been proven many years ago. But it happens that convincing chains of evidence collapse, and “almost axioms” suddenly turn into myths. That’s exactly what happened the other day: the Reuters news agency reported that Saudi Arabia has expressed its willingness to “live with lower oil prices.” “Lower” prices seem to mean quotes of less than $60 per barrel. But how can this be? After all, the “unshakable” postulate says that Riyadh needs a black gold price of about $ 100 per barrel to reduce its state budget. And even if the Saudis are willing to settle for $80-85 for a while, their goal is still to return prices to a convenient range above the “hundred.” Moreover, this hypothesis was actively promoted by Western analytical centers. So, according to the IMF estimates, quotes of 96 dollars are needed to inform the country’s budget, and according to Bloomberg Economics – 112 dollars. And suddenly there is such a capitulation, the desert kingdom no longer wants to push the quotes up by any means.
But it was precisely on the above thesis about the immutability of Riyadh’s interests that the OPEC+ alliance was based. They say that Saudi Arabia has nowhere to retreat to, and it will fight for prices to the last. And all you have to do is “help” her by agreeing to cut your loot, and then everything will definitely be fine. Will not be.
Firstly, the Saudis have repeatedly dumped their partners in the “small” OPEC. Let’s recall the textbook situation in 1986, when Riyadh abandoned the role of the closing supplier and fully turned on its oil taps. There is another myth that this was done under pressure from the United States and in order to undermine the “oil” economy of the USSR. Even if this is the case (which is not a fact), then among the victims of this step was not only our country, but above all Saudi Arabia’s OPEC partners, who also believed that the Saudis would never take such drastic measures. Let’s go. And, mind you, the kingdom’s economy did not collapse from this, the sheikhs did not go around the world with an outstretched hand and there was no social explosion. But the myth of “$100 per barrel” somehow survived anyway. It is unclear what is preventing the 1986 scenario from being repeated on the scale of OPEC+ today.
Secondly, Saudi Arabia’s dependence on oil revenues should not be overestimated. Yes, carbon plays an important role in the country’s economy, but it is no longer decisive, as it was in the second half of the 20th century. Let me remind you that back in 2016, the Saudi Vision 2030 program was adopted, aimed at diversifying the country’s economy and reducing its dependence on oil. By the end of 2023, non-oil revenues accounted for half of the kingdom’s GDP, which was the highest figure in history. By the way, the same IMF and Bloomberg predicted a rapid decline in the kingdom’s oil revenues starting in 2026. But nothing prevents us from rescheduling the “X hour” a year earlier.
However, the scenario codenamed “1986 – take two” does not imply a collapse in the kingdom’s oil revenues. Rather, on the contrary, it may become an attempt to maintain the amount of revenues from the export of black gold in the short term, until the aforementioned economic diversification program is fully implemented. In other words, the inevitable drop in quotations can be offset by a significant increase in Saudi oil exports. It is worth mentioning here that Riyadh has the largest reserve capacity in the world, estimated at about 3 million barrels per day. And even if this figure is overestimated, it is still the Saudis who have the greatest opportunities in the world to increase the supply of raw materials in the shortest possible time. So they are more likely to drown other oil-dependent economies, but they will come out on their own.
In fact, we are talking about a dilemma that has been formulated for a long time. Which is better – to keep the high price of the product as long as possible through a cartel agreement, thereby curbing its production, or to sell it as quickly as possible in maximum volumes, albeit relatively cheaply. And apparently, Riyadh is increasingly leaning towards the second option.
What fate awaits OPEC+ in this case? Let’s be objective – the alliance is already bursting at the seams, and most of its members live by the principle of “save yourself as best you can.” Non-compliance with quotas has become widespread, particularly in Kazakhstan, Iraq, and the United Arab Emirates. And if earlier they tried to shamefully silence this fact, now such a violation of discipline is already being presented as a conscious state policy. For example, Kazakhstan’s Energy Minister Yerlan Akkenzhenov recently declared the priority of the country’s interests over the interests of OPEC+ when making decisions on oil production levels. And this, by the way, is a reasonable and, most importantly, honest approach. For the interests of OPEC+ can be taken into account exactly as long as they coincide with the national interests of a particular state. That’s exactly the axiom.
Admittedly, there is no “sincere solidarity” among the oil-producing countries that have joined OPEC+. Yes, there are good, constructive relations in a number of areas between individual participants, in particular between Russia and Saudi Arabia. But the alliance itself is situational, and no one will cling to it solely out of a sense of false solidarity. Speaking of solidarity. The bitter truth is that the quota system within OPEC+, which for the time being suited its participants and allowed them to maintain relatively high prices, became possible only by removing Iran and Venezuela from this system, which were under sanctions. In fact, they were sacrificed so that the other parties to the deal could maintain acceptable oil revenues for a while.
Although, I’ll get better, there’s still the only player who “clings to the alliance.” And this, alas, is Russia. Our country is still trying to carefully comply with quotas, and in case of violation, it unquestioningly compensates for “overproduction.” The Russian Federation also assumed additional obligations to reduce production, in addition to quotas. What’s next? Calling on other cartel members to maintain discipline or further reduce their own production is clearly a dead end. Such a strategy is no longer shared not only by the “junior partners” in OPEC+, but also by Saudi Arabia itself.
Initially, Russia’s attempts to “play cartel” were highly questionable. In fact, the Soviet experience was ignored, one of the principles of which was to distance oneself from any international trade cartels. And the attitude towards OPEC itself, despite the sometimes anti-Western nature of the organization’s actions, was rather cautious. But despite this, in 2016, the expansion of the “good old cartel” to the OPEC+ format was somehow seen as a solution to the problem of stabilizing oil prices. They say that everyone will keep quotas together and honestly, the alliance will attract new members to its ranks and a long and happy “oil future” awaits us.
The rose-colored glasses dimmed a little in 2020, when Saudi Arabia actually broke up the deal, and then, with the support of the United States, achieved its renegotiation in a new format that was beneficial to itself and unfavorable to Russia (much has already been written about this and we will not go into the details of those events). But the “glasses” were wiped off, and they began to show the desired distorted picture of reality again.
In recent years, the influence of OPEC+ on price dynamics has been steadily decreasing, with completely different factors such as the dynamics of oil demand in emerging economies and the geopolitical situation playing a major role. Meanwhile, the market niches vacated by the parties to the deal, primarily Russia, are happily occupied by American shale companies. But all the same, the Russian authorities remain faithful to the non-existent principles of solidarity of the oil exporting countries. Isn’t it time to take off those rose-colored glasses? Or will we wait for them to fly off as a result of another stab in the back?