What Will the Failure of the Doha Oil Talks Bring?

FUJI Kazuhiko
Senior Fellow, RIETI

Russia's deepening antagonism toward Saudi Arabia

There were some countries that changed their attitude at the very last minute, said Russian Energy Minister Alexander Novak, speaking to reporters following the marathon oil talks in Doha, Qatar. "Yes, this was Saudi Arabia and ... states of the Persian Gulf," he said with apparent displeasure.

On April 17, 2016, the meeting of the world's 18 major oil producing countries, including Russia, in the Qatar capital city ended without a deal on the freeze of oil output, and many blame Saudi Arabia, which refused to compromise, for the failed talks.

Following the lifting of international economic sanctions over its nuclear program in January 2016, Iran has been pursuing a policy to raise the level of crude oil production, which fell to 2.8 million barrels per day, to the pre-sanctions level (four million barrels per day). How to handle this was a focal point of the Doha talks.

"Staging a look of agreement by reaching a gentlemen's agreement to freeze oil production at January production levels through October 2016" seems to have been the intended scenario for the April 17 meeting (Nihon Keizai Shimbun, April 19, 2016).

Novak had been trying to forge a deal at all costs, taking the stance that "those who don't wish to join—no one will force them to join up." However, the talks broke down because Saudi Arabia insisted on what he termed as an "unreasonable" demand that Iran, despite its absence from the meeting, be part of the freeze deal (Reuters, April 18, 2016).

The Organization of the Petroleum Exporting Countries (OPEC) will consult again on the proposed output freeze in its forthcoming meeting on June 2, 2016. However, no prospect is in sight for the gulf of mistrust between the parties concerned to be bridged. The failed Doha talks were characterized by an overwhelming sense of futility, for instance, leaving OPEC member countries and Russia, which had been calling on them for cooperation, with ill feelings toward each other.

A widely shared view among experts is that Saudi Arabia "turned the OPEC into a meaningless gathering by abandoning its role as a swing producer and hence losing almost entirely its influence over other oil producing countries," as noted by Masumi Motomura, executive chief engineer at Japan Oil, Gas and Metals National Corporation (JOGMEC).

Why is Saudi Arabia unwilling to freeze the oil output?

Just like Russia, Saudi Arabia is facing a financial predicament with its military spending continuing to increase amid plunging oil revenue. The situation is supposedly harsher in Saudi Arabia, which is spending more than $1.5 billion per month on air strikes in Yemen. Despite this, why does Saudi Arabia seem to be less forthcoming in forging an agreement that would help increase crude oil prices?

The answer can be found in Saudi Deputy Crown Prince Mohammed bin Salman's interview with Bloomberg on March 30, 2016.

During the five-hour interview, Prince Mohammed laid out a plan to get the kingdom ready for the end of the oil age and wean it away from the dependence on crude oil by creating the world's largest sovereign wealth fund (SWF) as a new, primary source of revenue for running the economy.

He said that the size of the SWF will eventually exceed $2 trillion, an amount enough to buy Apple Inc., Google Inc.'s parent Alphabet Inc., Microsoft Corporation, and Berkshire Hathaway Inc.—the world's top four companies in market value.

The first step in the plan is the sale of Saudi Aramco, the national oil company of Saudi Arabia. With the initial public offering (IPO) slated for as early as 2017 to sell less than 5% of the company, the kingdom aims to transform the oil giant into an industrial conglomerate. Using proceeds from the sale of shares in Saudi Aramco, the SWF will invest both at home and abroad as the key player of the Saudi Arabian economy (the proportion of foreign investments currently stands at 5% but will rise to 50% by 2020).

Prince Mohammed was quoted as saying, "Within 20 years, we will be an economy or state that doesn't depend mainly on oil."

No Achilles heel in Saudi Arabia's reform?

It has been nearly 80 years since oil was first discovered in Saudi Arabia. Will members of the Saudi royal family and other conservatives, who have become accustomed to living on handouts from the government over the years, be ready to follow the drastic reform envisaged by Prince Mohammed?

Consider the planned IPO of Saudi Aramco for example. It is questionable whether the kingdom will surrender its control over the company, a highly treasured asset for the Saudi royal family, and give it over to the hands of capitalists from the United States and Europe. Also, once the company goes public, it will be required to give priority to shareholders' interests. The likelihood is that Saudi Arabia will become unable to pursue its oil strategy in the same way as it has done to date.

In a bid to plug a budget hole, Prince Mohammed, who is said to be popular among young Saudis, plans to reduce subsidies and generate $100 billion a year in additional revenue by introducing a value-added tax and levies. However, underestimating the rising discontent among the public could result in an unexpected backlash.

A series of Saudi royal family members critical of the current regime have disappeared over the years (April 12, 2016 issue of the Japanese edition of Newsweek). Prince Turki bin Bandar, an advocate for nonviolent political reform who defected to France and was planning to write a tell-all book, went missing while on a business trip in Morocco. Prince Saud bin Saif al-Nasr, who has been tweeting about alleged embezzlement within the royal family, disappeared a few days after he publicly called for the removal of King Salman bin Abdulaziz Al Saud. Rumors have it that they are being under house arrest in Saudi Arabia. But the ongoing situation seems to be reflecting the intensifying race for the throne among prospective successors to the king.

Would it be stretching things too far to say that Saudi Arabia, which is about to embark on the largest reform in its history, not only sees a rise in crude oil prices resulting from the proposed production freeze as an obstacle to the reform, but also finds such a tactic unrewarding because it would only benefit Iran, a long-time foe, and shale oil and gas companies in the United States?

Rising geopolitical risk has greater impact than output freeze

Following the breakdown of the talks on oil production freeze, the benchmark West Texas Intermediate (WTI) crude oil futures price temporarily plunged to $37 per barrel. However, crude oil prices bounced back sharply in the wake of Kuwaiti oil workers' strike, which reduced the nation's oil output to 1.10 million barrels per day, compared to an average of 2.81 million barrels per day in March 2016 (the strike ended in the afternoon of April 20). The decrease of approximately 1.70 million barrel per day is nearly comparable to a supply surplus in the global crude oil market (approximately two million barrel per day) and has a far greater impact than an output freeze agreement.

However, this turn of events cannot be welcomed without reservation. The Kuwaiti oil workers' strike had been prompted by the government's austerity measures, namely, drastic pay cuts in wages for public-sector workers and welfare benefits for the general public.

Prince Mohammed has said that the kingdom is working to alleviate the impact of subsidy cuts on its citizens (Bloomberg, April 18, 2016). However, if the government mishandles the situation, it may result in a large scale strike in the Saudi oil sector.

In its latest fiscal projections announced on April 13, the International Monetary Fund (IMF) said that oil exporting countries will suffer a fiscal deterioration of more than $2 trillion over the next five years, as compared to the five years from 2004 to 2008, during which crude oil prices were on the rise. We may have entered an era in which the forecasting of future crude oil prices requires extra attention to geopolitical risks in oil exporting countries.

April 26, 2016

May 2, 2016

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