The increasing instability in Saudi Arabia, highlighted again by the weekend attack in the eastern oil town of Khobar, is almost certainly bringing closer the day when there will be a regime change in the country from the mainly pragmatic royal family (the House of Saud) to a potentially more belligerent and anti-U.S. regime. That prospect is the main reason why the United States, under the umbrella of the Russia-U.S. energy dialogue, is pushing Russia to facilitate more investment in oil production and in the provision of greater export capacity.
In return -- and taking into account similar if less formal understandings with the EU, Japan and China -- President Vladimir Putin's administration can expect to see remaining barriers to Russia's integration with the global economy, including WTO admission, removed with relative ease, as well as an automatic seat at the top table of global politics.
For the past three decades, the Saudi government has dominated and dictated strategy within OPEC. That arrangement has suited Western consumer countries, particularly the energy-hungry United States. In return for guaranteeing a high degree of predictability in the long-term average export price plus surety of adequate supplies, the legal status of the OPEC cartel has not been placed under scrutiny and the security of the Gulf Arab regimes has been assured. That arrangement was called into question as a result of the first Gulf War and effectively died in the aftermath of Sept. 11, 2001.
Even if the Saudi regime were to survive, it would surely only be able to do so by acquiescing to the internal pressures now threatening to overthrow it and, thus, would effectively be forced to become a less reliable energy partner to net consumer countries. Saudi Arabia's traditional role is now accruing to Russia and many assume it will be cemented by the end of this decade. In anticipation of that, we are seeing growing evidence of the Russian government's ambition to establish greater control over the oil industry, possibly including the creation of a new state-controlled oil company that would rank alongside the world's oil giants.
Over the past four years, the government has prioritized fast growth in oil exports because it needed the cash and was content with retaining control only of the export infrastructure. Recent evidence from Putin and several government ministers, including energy supremo Viktor Khristenko, suggests that they would now like to see investment priorities shift to reserve replacement (i.e., finding new wells) before resuming growth in production later in the decade. That would also suit the broader economic agenda, which is now focused on using the fiscal strength of the natural resource industries to push Putin's core objective of growth diversification and wealth distribution.
In order to derive maximum advantage from effectively displacing Saudi Arabia as the main energy partner to the West and as a cushion against future OPEC uncertainties, it makes sense that the Russian government would also want to control a large portion of the upstream industry, through which it could, for example, conclude joint-venture agreements with the international oil majors that are keen to get access to Russia's reserves.
That would be consistent with everything we have seen over the past four years and would go a long way toward explaining why the government moved so decisively to prevent any strengthening in the influence of Mikhail Khodorkovsky's Yukos in dictating energy policy, and why it now seems intent on acquiring control over Menatep's controlling stake in the oil major.
To many, the current reaction of the oil market to the prospect of disruption in export supply from Saudi Arabia, at a time when the reliability of exports from Iraq is also in question, is a foretaste of what might be to come should a regime change in Saudi Arabia lead to a more politically active OPEC leadership. Not only does that offer the prospect of a much higher average price than the $20 per barrel of the past 20 years or the current $22 to $28 price band favored by Saudi Arabia and its more moderate Gulf allies, it also opens the way for a cartel more inclined to use the oil tap as a means of realizing its political goals. That prospect has certainly scared governments in countries that, despite the growth in technology and service-based industries, remain vulnerable to oil shocks, and it is a major factor supporting the growing assumption that the United States has been planning for a post-OPEC world since the early 1990s.
Reports of growing instability in Saudi Arabia have been emerging almost since the overthrow of shah of Iran, and the evidence is that incidents have been increasing steadily in the 13 years since the first Gulf War. In broad terms, the reasons for this are the growth of Islamic fundamentalism and increasing unhappiness among the fast-growing population over unequal distribution of the nation's oil wealth. In response to this, the senior leadership in Saudi appears to have split into three separate groups, each with different goals.
The "old guard," headed by Defense Minister Prince Sultan and the governor of the Riyadh region, is the one most often singled out by Western media as the core of the U.S.-Saudi relationship and it appears to attract greatest resentment from the population for its wealthy lifestyle. The second group is probably the least powerful and is associated with Crown Prince Abdullah. Media reports suggest that the crown prince is trying to force changes in Saudi Arabia to accommodate popular demands and to achieve a more equitable distribution of wealth. The third group is headed by the ailing King Fahd's son, Abdul Aziz. Western intelligence reports link him to the funding of radical Islamic schools.
Recent independent (and illegal) surveys claim 90 percent popular support for a regime change.
Russia currently exports just over 6.5 million barrels per day, taking crude oil and product together. Assuming current development plans are realized by the end of the decade, this export total should reach approximately 9 million barrels -- roughly equal to Saudi's current export capacity. Combining that with exports via new pipelines from the Caspian (including the Baku-Ceyhan pipeline that is due to open late next year) plus a conservative assumption of net Iraqi exports of 5 million bpd, by 2010 there will be a very significant cushion of non-OPEC-controlled oil that will mitigate any serious damage from uncertainty surrounding Saudi Arabia.
As OPEC ministers meet this week in Beirut to review oil quotas, the issue preoccupying them is more than just the short- to medium-term outlook for oil prices.
High oil prices that stay high for too long inevitably hasten the loss of OPEC's market share and force the sort of political reaction from net consumer countries that, while significantly benefiting Russia, places the future relevance -- if not the very existence -- of the cartel in jeopardy.
Christopher Weafer, chief strategist at Alfa Bank, contributed this comment to The Moscow Times.