A central question being asked after the collapse of oil producers' talks in Doha over the weekend is what was driving Saudi Arabia's shift to a harder line that ultimately scuppered a deal?
While the broader regional tensions between Saudi Arabia and Iran played a part it may be that the status quo suits Saudi policy goals.
“The Saudis are taking the long view of the oil markets and recognise that they will no longer be playing the role they have in the world economy 50 years from now,” said Jason Tuvey, a Middle East economist at Capital Economics.
“If oil prices stay where they are it forces more investment from high-cost oil production off the market and allows time to force through the internal economic transformation policies that [Prince Mohammed bin Salman, the deputy crown prince] has been pushing for,” he says. “If it hurts Iran in the meantime, then ‘well and good’, they may feel.”
The key development in the past year has been the US$300 billion-to-$400bn of investment that has been cancelled, particularly in the US shale oil sector as well as expensive projects in older provinces such as the North Sea.
US output has fallen by 600,000 bpd from a 40-year peak last year to about 9 million bpd.
The prolonged oil recession has led to bond defaults and bankruptcies in the US shale sector, changing perception about its ability to bounce back quickly when prices rise, Daniel Yergin, the vice chairman of the oil consultancy IHS, has said.
Even with higher oil prices, “companies are going to be more cautious, their boards are going to be more cautious, and their banks are going to be more cautious”, he said.
That would put the burden of “swing producer” on the high-cost producers, which has been Saudi Arabia’s goal since it precipitated the oil price collapse nearly two years ago.
There is a growing sense that the unexpected failure of the deal also reflected Saudi Arabia’s internal policy machinations. “There seem to be underlying tensions between [the Saudi oil minister Ali] Al Naimi and [Prince] Mohammed bin Salman, given that Mr Al Naimi had previously agreed to sign up to some agreement to freeze output,” said Mr Tuvey.
The Saudi delegation had agreed to Sunday’s meeting knowing for weeks that Iran would not accept a cap until after it had raised its output back to 4 million barrels per day, the level before nuclear-related sanctions were imposed in 2012.
Russia’s energy minister, Alexander Novak, who had acted as a go-between last month when he elicited a pledge from Iran that it would at least consider joining a freeze after it returned to full production, said Saudi Arabia appeared to abruptly change course over the weekend.
“We expected an agreement would be reached and I thought the countries that have come here did it in a bid to reach an agreement but not to discuss … countries that did not take part,” he told Russia’s Tass news agency, referring to Saudi Arabia ’s renewed insistence that Iran also commit to a freeze.
On Wednesday, Prince Mohammed had said that the country would agree to freeze only “if all major producers agree to freeze”.
There have been signs at least since the start of the year that the reformist-minded 30-year-old deputy crown prince has been meeting resistance within Saudi Arabia’s oil establishment, who are wary of his plan to “privatise” Aramco as a central plank of his goal to transform the economy and reduce dependence on oil.
Prince Mohammed “seems to have been winning in this internal power struggle, and if that is the case then he probably also was loath to go back to old strategies to shore up prices, which reflect back to the disasters of the 1980s and ’90s”, Mr Tuvey said.
According to Mr Yergin, the failure of price strategies in those decades led to the de facto end of Opec’s role as a cartel, leaving it more of a Saudi-led talking shop.
One of the puzzling aspects of the Doha freeze talks is that they were widely seen as a symbolic gesture.
Most of the countries that turned up to Doha already had been struggling to maintain output levels, or they have shown little inclination to adhere to any such deals in the past.
The collective output of the Latin American contingent – Venezuela, Columbia, Ecuador, Mexico and Bolivia – had fallen to below 8 million bpd in February and last month for the first time in two years.
Iraq, which has potentially much more capacity than Iran, has struggled just to maintain current output because of its internal strife. The government recently had to issue bonds to unpaid foreign oil contractors in lieu of the billions of dollars they are owed.
Meanwhile, Russia, which is one of the few non-Opec countries that have been increasing production, was fluid in its interpretation of the previous Opec/non-Opec output deal at the start of the century. Mr Novak last month said any deal would apply to Russia’s production “but not exports”, which have been rising sharply.
“It was only ever going to be symbolic, but symbolic matters for the market,” said Cyril Widdershoven, a partner in the energy risk consultancy Verocy.
amcauley@thenational.ae
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