Having had to make his travel plans even more furtively than usual - given the International Criminal Court arrest warrant out for him due to war crimes in Ukraine - Russian President Vladimir Putin arrived in the Middle East last week looking like a man with more questions than answers. Perhaps in some alternate universe, his troops had overrun Ukraine in a month, enabling Russia to threaten the U.S.-led Western NATO alliance with further military incursions into the Baltic States, Poland, and Romania to begin with, as they had been supposed to do. Emboldened by this success, the Middle East’s other OPEC+ members could have moved as one against the U.S.’s key ally in their midst – Israel - and wiped it off the face of the planet, as they have specifically long vowed to do. And in the final conflict that would herald the new ‘multi-polar world order’ in which China and Russia would overtake the U.S. and its allies as the foremost global powers, Beijing would have captured Taiwan, as it in turn has long intended to do. But it is not an alternate universe, it is this one, and in this one Putin is near to having no good options left, and nor has OPEC+.
While the fallout from the Ukraine war continued to keep oil and gas prices high, Putin’s broader plan was still more or less intact, if somewhat delayed. As analysed in depth in my new book on the new global oil market order, Russia earned nearly US$100 billion from oil and gas exports during the first 100 days of the war in Ukraine. Overall, revenues from the higher post-invasion oil and gas prices were significantly greater than the cost for Russia of continuing to fight the war. As prices started to weaken again, Russia’s OPEC+ allies cut oil supplies to push them back up again. The high energy prices also pushed inflation higher in net-energy-importing countries in the West, causing interest rates to spike to such a degree that long-term recessions loomed in several key economies. So high-handed were these OPEC+ members – especially Saudi Arabia and the UAE - that they refused even to take a telephone call from U.S. President, Joe Biden, in March 2022, to discuss how they might be able to help deter Russia in its actions and bring down oil and gas prices, as also analysed in depth in my new book. Related: U.S. Gasoline Prices Continue Falling as Futures Hit Two-Year Low
A sign of how Russia and China’s new world order would work out for Middle Eastern states came from the fact that as international sanctions were increased on Russia, Moscow was busy doing under-the-counter oil and gas deals whose sole selling proposition to buyers was that they undercut the official OPEC+ prices. Consequently, the higher Moscow was able to persuade the other OPEC+ producers to raise official oil prices, the more attractive discounted Russian oil looked, as also analysed in my new book on the new global oil market order. China and India have remained the two big buyers of this dark Russian inventory, regardless of any other considerations.
Attempting to keep this same strategy in play, then, is one of the two key reasons why Putin flew to the Middle East last week and met with those he regards as his two most useful regional allies – Mohammed bin Salman, and Mohamed bin Zayed al Nahyan. As a senior Washington-based legal source close to the U.S. administration exclusively told OilPrice.com last week: “He [Putin] wants oil prices a lot higher fast, as the [Ukraine] war is draining the treasury, and he know he needs to keep fighting it or the game’s up for him.” Something, though, has changed, for Putin – so serious that he risked arrest or worse last week – and that is China’s view of the world order as it currently stands. “Things are different now with Beijing – Russia’s quick win didn’t happen, so the move on Israel looks plain stupid, and China’s got its own problems at home,” added the source.
The switch in China’s view on Russia, also detailed in my new book, has been extraordinary – both in timing and tone. Just three weeks before Russia invaded Ukraine, Putin held his first in-person meeting with his Chinese counterpart Xi Jinping for nearly two years, at the opening of the Winter Olympics ceremony in Beijing. After this meeting, China and Russia had issued a joint communiqué on 4 February in which they had stated that: “Friendship between the two States [China and Russia] has no limits, there are no forbidden areas of cooperation”. At around the same time, several huge new cooperation deals in the oil and gas sectors and beyond were announced by state news agencies on both sides.
However, within a week of the Russia-Ukraine war having spread to Ukraine’s major cities, Xi held urgent talks with Putin and advocated peaceful negotiations between Russia and Ukraine. At the same time, China’s then-Foreign Minister Wang Yi told senior European officials that China respects countries’ sovereignty - including Ukraine’s. Such a swift public intervention by Beijing to clearly state its view on respecting other countries’ sovereignty - when this was precisely what Russia’s invasion of Ukraine had not done - shocked Putin, according to senior Moscow-based sources close to the Russian president, exclusively spoken to by OilPrice.com at the time. He had been certain before the invasion that China would stand by Russia - whatever it did - in line with the ‘no limit’ friendship joint communiqué.
China has even less interest now in openly siding with either Russia or OPEC+ against the U.S. and its allies, given the precarious state of its economy after its turbulent Covid years. Following the release of June’s youth employment data - which showed such unemployment at a record 21.3 percent - the government stopped publishing the figures. China’s top political figures – including Xi – are acutely aware of the potential for high youth unemployment to spiral into widespread protests. It also knows that just before the series of violent uprisings in 2010 that marked the onset of the Arab Spring, average youth unemployment across those countries was 23.4 percent. From the economic perspective, although China can buy oil and gas at 30 percent or more discounts from its key Middle Eastern suppliers through various deals agreed in the past few years, it is a fact that the economies of the West remain its key export bloc. The U.S. still accounts for over 16 percent of China’s export revenues on its own. According to a senior source in the European Union’s (E.U.) energy security complex spoken to exclusively by OilPrice.com recently, the economic damage to China – directly through its own energy imports and indirectly through damage to the economies of its key export markets in the West – would dangerously increase if the Brent oil price remained over US$90-95 pb for more than one quarter of a year.
In fact, China’s current view on where oil should ideally be priced is extremely close to the U.S.’s long-held view, as also analysed in full in my new book on the new global oil market order. The floor of Washington’s ideal crude oil price range is US$40-45 per barrel (pb) of Brent, as it is seen as the price at which U.S. shale oil producers can survive and make decent profits. The ceiling of the range is regarded as US$75-80 pb of Brent for two reasons – one political and one economic, although they are connected. The political reason is that since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, if it was in recession in this timeframe, then only 1 sitting president has won out of 7 times (although even the 1 is debatable). The economic reason based on longstanding estimates is that every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost. Crucially in this context, historically around 70% of the price of gasoline is derived from the global oil price.
By Simon Watkins for Oilprice.com
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