Saudi Arabia relents in oil price war, as an uncertain future emerges
The meeting was chaired by Russian Energy Minister Alexander Novak and Saudi Energy Minister Prince Abdulaziz bin Salman - representatives of two countries which had chosen to increase production in an effort to capture European markets with discounts, as well as to undercut American shale oil producers.
The announcement of the new reduction, which will amount to some 10 percent of total global supply, is one sign of useful international collaboration during the crisis. At present, the cuts are set to be eased to eight million barrels per day between July and December, before later being eased again to six million barrels per day between January 2021 and April 2022.
Although these measures can limit losses, they will certainly not stop them, even in a place like Saudi Arabia which enjoys low production costs and had been reticent to accept such a deal.
US President Donald Trump, whose administration has been close to Saudi Arabia since his first state visit to the country in 2017, had urged a deal between Russia and Saudi Arabia due to the price war's impact on US energy producers. This deal therefore has major domestic implications for Trump.
Indeed, the US relationship with Saudi Arabia had once again become an issue in domestic politics, with Republican Senators from oil-producing states having presented legislation last month to remove American military from Saudi Arabia due to its role in the recent oil price war.
|Non-oil economic growth is predicted to decrease 1.4 percent in 2020
Dan Sullivan of Alaska and Kevin Kramer of North Dakota introduced the legislation to remove US troops, Patriot missiles, and Thaad defence systems unless it agreed to cut its oil output. Although it is unlikely that such legislation would have ever passed, the fact that it was at least threatened shows how Saudi actions could have a major impact on American domestic politics and potentially turn Republican allies against them.
The issue of oil prices, unlike the killing of Jamal Khashoggi in October 2017, has a very real economic impact, and has thus spurred action from the president, as the Trump administration repeatedly voices its desire to reignite the economy after the coronavirus pandemic.
The fact that the oil price reduction has had such an impact on the domestic Saudi economy that it chose initially to pursue its own policies on production, demonstrates how short Saudi Arabia has fallen on the goals of Vision 2030.
Indeed, in 2016, Crown Prince Mohammed bin Salman (MbS) predicted that, by 2020, his country "will be able to live without oil" as its prime export. The extent to which this is untrue today has been thrown into sharp relief, particularly when it comes to the state's diminished ability to finance Vision 2030 to help aid diversification away from oil.
In fact, non-oil economic growth is predicted to decrease 1.4 percent in 2020, from 3 percent in 2019. Such losses are due in part to diversification efforts concentrated in sectors like tourism and entertainment, which are not yielding profits at present. The projected losses also demonstrate the degree to which oil remains the backbone in financing and spurring economic diversification.
Further, work at NEOM, the futuristic city that was meant to be a major hub for Saudi Arabia and the region to house one million residents by 2030, has stopped. It appears increasingly likely that the city could face a similar fate to the Economic Cities plan promoted in the late 2000s, which involved constructing six cities to aid diversification; the plan lost momentum, and only one city, the King Abdullah Economic City, was ultimately constructed.
Nonetheless, as a sign of efforts to continue diversification, the Saudi Ports Authority announced on Monday an agreement with Saudi Global Ports to build and operate container terminals at a port in Dammam in order to increase its capacity by more than 120 percent.
Further, the country's sovereign wealth fund the Public Investment Fund (PIF) has recently taken an 8.2 percent stake in Carnival cruises and has just announced a deal to acquire Newcastle United. All of these investments, however, could have questionable yields in the short to medium term given the pandemic.
Additionally, it appears that Saudi Arabia is trying to extract itself from its unsuccessful war in Yemen that has cost the country an estimated $100 billion since 2015. On 9 April, Saudi Arabia announced a two-week unilateral ceasefire in response to calls for a truce by UN special envoy Martin Griffiths - shortly after Saudi Arabia had invited the Houthis to Riyadh for peace talks.
In July 2019, the UAE decided to withdraw its troops, and Saudi Arabia appears eager to cut its losses and follow suit. Coronavirus may give it the opportunity to do so, which would certainly cut costs, but would still leave Yemen in a highly vulnerable humanitarian and political situation.
Aside from the economic challenges highlighted here, earlier this month, it was revealed that as many as 150 members of the al-Saud family have been infected with Covid-19.
|It is likely not enough to salvage ambitious Saudi diversification efforts
This makes addressing the pandemic an even more urgent issue, and one that could spur further centralisation of power in the hands of MbS.
In early March, MbS arrested three senior members of the ruling family, including King Salman's brother Prince Ahmed bin Abdulaziz and former Crown Prince Mohammed bin Nayef and his brother Prince Nawaf bin Nayef, in a move designed to reassert his authority. Further, on 15 March, 298 government employees were arrested on suspicion of corruption, a charge used in the past to eliminate political or economic rivals.
Although coming to an agreement on production cuts is one step toward greater economic cooperation in the energy sector amidst chaos, it is likely not enough to salvage ambitious Saudi diversification efforts, the failure of which could affect MbS's domestic political standing.
Dr Courtney Freer is a research fellow at LSE Middle East Centre.
Follow her on Twitter: @CourtneyFreer
Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.