Saudi Arabia’s decision to scupper negotiations on a coordinated oil output freeze in Doha on Sunday seems to confirm a significant shift in the kingdom’s oil policy.
For decades, the kingdom has insisted it does not wield oil as a diplomatic weapon, but at the weekend it did just that as part of an intensifying conflict with Iran. The kingdom’s position on Iranian oil production has steadily hardened over the course of the last year and at the weekend it reached its logical conclusion.
Saudi Arabia will not accept any constraints on its output, even freezing at record levels, unless Iran agrees to similar controls, which it has rejected until production has reached pre-sanctions levels.
By insisting on this hard-line position, Saudi Arabia ensured the talks would fail, and the kingdom seems comfortable with the outcome. Diplomatic strategy seems to have trumped oil market considerations.
Saudi Arabia would rather have a lower oil price and lower revenues for all producers, including itself, rather than reach a production agreement that would deliver increased income to its arch-rival across the Gulf. Iran has reiterated for more than a year that it intends to increase production to pre-sanctions levels before it will consider any restraint to help stabilise prices, a position that most other oil producers have quietly accepted.
Boosting oil exports and revenues in exchange for controls on its nuclear activities was the centrepiece of the deal between Iran and the permanent members of the United Nations Security Council reached in July 2015. Saudi Arabia has consistently opposed the nuclear deal fearing that it will strengthen Iran economically and allow it to increase funding for proxy conflicts in Lebanon, Syria, Iraq and Yemen.
Until recently, however, the kingdom’s oil policy appeared to be in the hands of technocrats in the petroleum ministry and Aramco, rather than be run as a branch of foreign policy. Saudi officials privately cast doubt on whether Iran would be able to increase its exports as rapidly as it claimed once sanctions were lifted. But the official line was that growing world oil demand would help the market accommodate extra Iranian crude without any need for output restraint by other producers.
By the end of 2015, it was clear the Saudi strategy of maintaining production and allowing low prices to drive high-cost producers out of business was working more slowly than originally expected. Amid pressure from some of the weaker members of OPEC in Latin America and Africa, as well as Russia, the Saudis reluctantly and provisionally agreed to an output freeze in February 2016. At Saudi insistence, the agreement between Saudi Arabia, Russia, Venezuela and Qatar, was conditional on adherence by other major oil producers.
So over the last two months, an intensive round of diplomacy assembled a large group of OPEC and non-OPEC producers representing 50 million barrels per day of production, more than half the world total. Sixteen oil-producing nations sent representatives to the summit in Doha meant to conclude a deal on a production freeze. Even if it had been successfully concluded, the draft agreement would have been weak. It would not have removed actual barrels from the market but it was meant to offer symbolic support to prices by encouraging hedge funds to focus on the gradual rebalancing of the underlying physical market.
In the end, most major producers sent representatives to Doha with the exception of the United States and Canada (unable to coordinate production because of antitrust laws), China (a net importer), Iran and Brazil.
It seems unlikely most of the participants would have agreed to attend unless they believed there was a realistic prospect of reaching a deal, since a failed summit would be worse than none at all. Pre-summit diplomatic contacts must have left most other countries with the impression Saudi Arabia was open to a deal that would necessarily exclude or make special provision for Iran.
In the run up to the summit, however, the Saudi position appears to have hardened. On the eve of the meeting, Saudi Arabia’s Deputy Crown Prince Mohammad Bin Salman warned the kingdom could increase its output immediately to 11.5 million barrels per day and 12.5 million within 6-9 months. The prince said the kingdom would increase its capacity to 20 million barrels per day if it chose to invest and reiterated any production deal would be contingent on Iranian participation.