Oil giants Russia and Saudi Arabia’s efforts to extend a deal, which is aimed at cutting supply for another 10 to 20 years to drive up prices, won’t scare off surging U.S. shale production, experts say.
But a long-term pact by the world’s top two crude oil producers would effectively formalize an alliance between them, strengthening Moscow’s position in the Middle East, where the U.S. has long been the dominant superpower.
“This would no longer be an agreement, but rather a permanent relationship,” said Ellen Scholl, deputy director at the Atlantic Council’s Global Energy Center. “From Russia’s perspective, I would assume this is a part of broader competitive front against the U.S. You see the U.S. nipping at the heels of the Russians and Saudis as the dominant crude producers in the world, which certainly changes things. But if you look at where the U.S. is and projecting to go, it will continue to remain one of biggest suppliers into international markets, regardless of what the Saudis and Russians do.”
OPEC and Russia are working on a long-term deal to cut oil supply, Saudi Crown Prince Mohammed bin Salman said Tuesday morning.
Salman, who is visiting the U.S. this month, told Reuters that the kingdom and Russia are considering extending an agreement between OPEC and non-OPEC nations such as Russia that began in January 2017 to drive up oil prices.
Crude oil prices have recovered to $70 per barrel from below $30 in 2016, but energy experts say the historic surge in U.S. output could limit the price increase. The U.S. is anticipated to experience “explosive growth” in oil production in 2018 and will surpass Saudi Arabia’s output for the first time, the International Energy Agency reported in January. The U.S. is expected to reach a historic high above 10 million barrels of oil production per day, an amount that would overtake Saudi Arabia and rival Russian oil production.
Combined, the three countries produce more than one-third of the world’s oil.
The potential deal is a sign that the 14-member OPEC is trying to adjust to a market increasingly influenced by U.S. shale.
The U.S. shale boom was a major contributor to the price collapse, which began in 2014.
OPEC, led by Saudi Arabia, first responded to lower prices by refusing to cut production, betting that would force high-cost U.S. producers out of the market. But U.S. producers have improved their drilling efficiency, lowered their break-even costs, and survived, pushing OPEC to turn to Russia to agree to cut output.
Experts expect U.S. producers to continue to thrive even if its competitors keep limiting production.
“The U.S works a lot different than its competitors,” said Jacques Rousseau, a managing director at ClearView Energy who specializes in global crude oil, natural gas, and refined products. “There is no cartels, and collusion to work together to manipulate the oil price, and there are many companies involved, where everyone is trying to make money for shareholders. From a big-picture sense, this U.S. oil is coming onto the market.”
Amy Myers Jaffe, a leading expert on global energy policy at the Council on Foreign Relations, says the Russians and Saudis have other reasons to limit production.
Oil-dominant countries are starting to think more about the potential for peak oil demand coming soon, when demand for oil begins to fall instead of rise.
As that happens, she said, Russia and Saudi Arabia, rather than ramping up production in the short-term knowing there may be limited time to sell their oil, may be wary of pushing prices too low as U.S. shale dominates.
“The danger if you are OPEC and Russia, is if you all put stuff on the market at the same time, at the same time people are wanting to throw money into U.S. shale, you will see a horrible downward spiral in prices that as a nation they can’t survive,” Jaffe said.
Jaffe says the Saudis are loathe to harm their relations with the U.S. as the two countries expand their energy ties in other areas, such as nuclear.
“I don’t see this [an extended OPEC-Russia deal] as an attack on the U.S. at all,” she said. “It’s the opposite. If you were Saudi Arabia and you are trying to convince the U.S. you are a great ally, you wouldn’t say we will dump the price of oil and hurt the U.S. industry. What they are saying is, we are prepared to hold up the market [price] for you forever. If you care about the health of the U.S. industry, that is a positive statement.”
Russia’s interests, however, are harder to discern.
“Russia is a lot more difficult to project,” Scholl said. “In Russia, most energy questions are political questions, so they could be trying to solidify itself as a trustworthy partner and potential alternative to U.S. influence in the region. But from their perspective, this also makes good sense. As the other big oil players, it makes a little bit of sense for the Russians and Saudis to team up and try to set a price that meets the revenues they need to balance their budgets internally.”
