Trump, Russia and OPEC’s latest production cut
Monday, December 12, 2016
While Donald Trump's transition headquarters is still trying to identify someone to fill the coveted Secretary of State position — likely Exxon Mobil CEO Rex Tillerson — the wheels of global energy geopolitics outside of Washington keep spinning.
Two months ago, a wave of hope among oil producers that OPEC had agreed on a production cut in Algiers soon fizzled out. This time the cartel is trying again.
The setting for the drama is Vienna, and the initial signs look more hopeful as OPEC leadership has persuaded Russia and other non-OPEC members to join in at this weekend's meeting, at least in principle. The initial rally in global prices on the back of news of the deal soon ended as the markets priced in cynicism over OPEC cheating and questions over Russian cooperation.
However, the timing is no accident — the prospect of a Trump presidency certainly influences how we now see the bigger picture.
No dent in the steadfast alliance
It is clear that OPEC announcements are not the market-shaking events they once were — oil prices did increase to above $54 per barrel for the first time in 2016 on the back of the deal, but the lack of confidence in OPEC's power soon led it to return to
The so-called "end of the OPEC era" has been described in the media as a clear victory for the U.S. over the Saudi-led cartel that, so the story goes, was refusing to make output cuts in order to inflict harm on the U.S. shale boom. However, I am one of many analysts who have never fully bought into this narrative of a destructive oil rivalry between the two sides of one of the world's most steadfast geopolitical alliances.
The U.S., despite being the world's largest oil and gas producer, was happy to see global prices fall. This is because high production levels do not make a country oil-dependent. Natural resource account for only around 1 percent of GDP in the US — in Saudi Arabia they account for 41 percent, in Iraq 42 percent and in Libya 37 percent.
While shale producers might grumble, the U.S. was not hurt by the price collapse. The Saudis, on the other hand, were likely persuaded by their ally to accept some punishment for lower oil prices in the short term in exchange for some other benefits.
This alliance will by no means be weakened by a Trump presidency. The media have spoken of strains on the U.S.-Saudi alliance in recent months, and Trump had some choice words for the OPEC "cartel" on the campaign trail. But crucially the Saudis see president-elect Trump as "a businessman who knows how to make a deal." This administration will likely see greater cooperation rather than less.
The Russian equation
Russia lies at the heart of this equation. The collapse of oil prices has been an unqualified disaster for Russia — the economy contracted across all sectors through 2016. This has been welcome news to Western leaders hostile to Putin, where it did not go unnoticed that oil prices were above $100 per barrel when Russia invaded and annexed Crimea. The Western sanctions against Russia merely exacerbated the crisis.
However, as we transition from Barack Obama to the Trump era, we are moving from an administration where China is tolerated and Russia is condemned to one where one of Trump's first moves was to cause a diplomatic rift with China by accepting a call from the president of Taiwan, and where Putin has been famously praised by Trump.
If oil prices rise, China — the world's largest energy importer — will have to pay a little more for its fuel (although the impact of oil prices on the Chinese economy is not a straightforward one). In the meantime, Russia will be given some respite from an economic crisis that at these levels of intensity could threaten even Putin's high popularity ratings as public sector salaries go unpaid.
In campaign speeches, Trump may profess to dislike the interventionist policies of OPEC's "illegal monopoly." But to give his Saudi and Russian allies some slack, he will likely give his tacit approval to a global price rise.
The realignment of diplomatic relations under Trump looks like it is being followed by a realignment of oil geopolitics, easing the pressure on the "losers" of the last couple of years, and reining in the "winners."
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