Saudi-Russian Oil Deal: Behind the Headlines
The headlines on yesterday’s Saudi-Russian oil deal blared that the two petroleum giants may be cutting back on production in an effort to force oil prices higher.
That’s not what the joint statement said.
The Saudi-Russian understanding did hint at the possibility of future production restraints, possibly keeping output at current levels, but it did not say the two countries would be taking any action now.
Oil prices did in fact spike by five percent—in advance of the formal announcement yesterday at a side even of the G20 summit in China—before falling back to a net gain of two percent.
The thrust of the Saudi-Russian agreement was for cooperation in world oil markets with an eye to recruiting new capital for exploration projects.
The key clause of the joint statement said that the two governments “recognize the current challenges in the supply side of the global oil market, including major contraction of capital investments in oil extraction on a global scale, particularly in exploration, as well as mass deferrals of investment projects.”
In other words, what the two countries are worried about more than anything else is the disappearance of capital from the oil and gas arena, a phenomenon which has been going on for around two years, thanks to the tanking of oil prices.
Oil prices were as high as $115 per barrel as recently as mid-2014 but since collapsed to a low of $27 per barrel earlier this year. Prices have since recovered to around $50.
Last year, BP, the world’s third-largest oil and gas company, announced investment reductions of $6 billion. Exxon Mobil, ConocoPhillips, and Occidental Petroleum all announced they are suspending new oil and gas projects while Shell is cutting spending by $15 billion over the next three years, impacting 40 of its global projects.
Breakbulk and project carriers—who once thrived on carrying oil and gas exploration equipment—have been hit by the cutbacks. “The overall market is weak, which is putting pressure on freight rates,” said Waldemar Poulsen, president and CEO of Rickmers-Linie (America), Inc., a breakbulk and project carrier based in Houston.
The key concern of Russia and Saudi Arabia is to be able to continue to supply oil to the world and not to cut back on production. The statement also mentioned cooperation in the development of new technologies, presumably to cheapen the costs of extracting petroleum.
The statement hinted at the possibility of a future freezing of oil production at current levels, a move which would unlikely have much of an effect on oil prices. Some observers noted that a production freeze by Russia and Saudi Arabia could actually cause prices to fall since Iran will be unlikely to along with the scheme and could increase production to make up for any shortfall. Also, Saudi Arabia and Russia are currently pumping oil at full capacity, so that freezing output at current levels will not have much of an effect on global oil supplies.
Peter Buxbaum is web editor of Global Trade.
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