An inability of the world’s oil exporters to come to an agreement on future production levels is further evidence that Russia can no longer rely on higher oil prices as an easy cure for its economic ills.
An Iraqi worker operates valves at the Nahran Omar oil refinery near the city of Basra, 340 miles (550 kilometers) southeast of Baghdad, Iraq, 2009. Photo: AP
The world’s leading oil exporters, which met in Doha, Qatar on Apr. 17, didn’t reach an agreement on freezing oil production. Russia – one of the most active supporters of this initiative – failed to persuade its fellow oil exporters to sign a deal to boost plummeting oil prices. That could have negative repercussions for Russia’s economy, which remains dependent on higher oil prices.
Moreover, some experts see the failure to reach a deal as a warning sign, which might have grave implications for the world’s stability. In particular, a sustained period of low oil prices might lead to social unrest and severe economic crisis in a number of countries in the Middle East.
Despite Moscow’s high expectations for the Doha summit, the odds of cutting the deal were actually very low from the start, given the rivalry among oil-exporting countries such as Iran and Saudi Arabia.
“Everybody is fighting for himself [on the oil market],” Stephan Roh, the president of ILS Energy, an energy consulting firm, said during a meeting of the Valdai Discussion Club on Apr. 19.
According to Roh, oil prices “will further go down,” given the fact that each nation tries to produce as much oil as possible to outpace its competitors. Roh sees such a trend as “frightening” and “destructive” in its nature. He warns that the inability to come up with an agreement on the oil production freeze will have “a tremendous impact on the oil market,” with geopolitical consequences as well.
“It provokes destabilization in the Middle East,” Roh said. With high oil prices having been the source of previous stability, their collapse could “amplify” the political unrest in those countries, which are heavily dependent on the oil rent. Given the fact that oil has been a powerful political weapon since the 1970s, today’s oil market is “imperfect” and all stakeholders, including Russia, should “take responsibility” and cooperate to maintain oil prices at an acceptable level.
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“There is demand for energy diplomacy,” Roh said in response to the question from Russia Direct.
Joseph Mifsud, the director of London Academy of Diplomacy, echoes Roh’s view. Particularly, he calls for boosting energy diplomacy, which according to him, is “extremely crucial” during a period when politics, economics and geopolitics are so interdependent.
The rivalry between Saudi Arabia and Iran, which Mifsud calls a “proxy war,” clearly manifested itself during the Doha summit and hampered all attempts to reinvigorate energy diplomacy. Mifsud sees this challenge as a “window of opportunity” for Russia to build “a bridge between Saudi Arabia and Iran” and encourages all stakeholders to be “more proactive, less reactive.”
In contrast, Igor Tomberg questions Russia’s role in pacifying Riyadh and Tehran, because Moscow always tries to be “neutral” in such disputes and cannot influence the agenda of the Organization of the Petroleum Exporting Countries (OPEC). According to him, Moscow should diversify its oil partners and turn to the East.
However, some economists argue that instead of looking for new oil consumers, Russia would be better off diversifying its economy and conducting sweeping structural reform. Among such experts is Vladimir Korovkin, the head of Digital Research at Skolkovo’s Moscow School of Management. Such an approach requires strategic, long-term thinking. The Kremlin just needs to broaden its planning horizon and give up any hopes of receiving substantial revenues from the oil rent in the near future.
The important lesson to keep in mind is that oil prices are highly cyclical in nature. “When prices rise sharply, they will also decline sharply. A long period of high prices is followed by a long period of low prices,” wrote Edward Chow, senior fellow of the Energy and National Security Program at the Center for Strategic and International Studies (CSIS), in the wake of the oil price drop in 2014.
Even the increasing instability in the Middle East doesn’t contribute to skyrocketing oil prices, like it was the case in the 1970s, when numerous conflicts in the region provoked a threefold increase in oil prices. Today, in contrast, they will remain at the same level or keep plummeting in response to regional crises.
With the U.S shale gas revolution, the development of renewable energy technologies and the lifting of the U.S. oil and gas export embargo, OPEC’s influence on the energy market is increasingly weakening: its best days seem to be over. No more can it manipulate global oil prices.
“If in the 1980s, OPEC was controlling over 80 percent of the world’s oil production, right now that percentage has been cut more than in half,” Oleg Buklemishev, an associate professor of the Faculty of Economics at Moscow State University (MGU), writes in his column for Russia Direct.
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Such a situation drives all stakeholders to defend their interests, which leads to a sort of "war of all against all," when one cares only about one’s profit. This indicates that all hopes for higher oil prices in the future seem to be misplaced - the Doha summit is just another reminder of this new reality.
For the Kremlin, this means coming up with a new economic strategy that is not so contingent on the price of oil. But that could be easier said than done. “For Russia, with its oil addiction, such a trend will most likely be increasingly painful,” warns Buklemishev.