Saudi Arabia and Russia are acting together to raise oil prices in the West while keeping Russian revenues growing despite sanctions.
Saudi Arabia and Russia announced on Tuesday they would continue their oil production cut until the end of the year, and likely even further. Following the announcement, Brent prices (the global oil benchmark) skyrocketed.
Saudi Arabia and Russia are two of the richest and most important petrostates, meaning their economy is mostly funded by oil and gas revenues. Saudi Arabia is the world’s largest oil exporter at 7.36 million barrels/day, followed by Russia at 4.78 million barrels.
Their massive oil exports are possible not only because of their large oil production but because of their relatively small populations as well. The United States, for example, is the world’s largest oil producer, but its extraction serves 300 million people compared to 143 million in Russia and 35 million in Saudi Arabia.
This massive export capability allows Russia and Saudi Arabia to single-handedly decide global oil prices. They can reduce oil production to a large enough extent to hurt foreign markets without impacting their domestic economy.
Starting in July, Saudi Arabia implemented a 1 million barrels/day oil production cut. Paired with a similar 300,000 barrels/day cut decided by Russia, global oil prices have consistently increased.
By leaving the oil production cut until the end of the year, Brent prices jumped to $90/barrel. Until Tuesday, oil prices hovered between $80-85/barrel.
Why the Russia-Saudi alliance
The obvious target for the increase in oil prices is the global West and, in particular, the United States. Combined with high inflation (especially in Europe), the oil production cut is directly responsible for the historically high fuel prices.
By increasing oil prices, Russia plans to mine Western popular opinion for the support of Ukraine’s war effort. Simultaneously, Russia needs to increase state revenues to fund its war machine and continue the invasion of Ukraine.
European Union and G7 countries agreed in December 2022 to an oil price cap against Russia, vastly reducing Russian revenues from oil. This plan would have worked were it not for Saudi interference, which increased the global oil prices de facto helping Russia.
Saudi Arabia used to be a close American ally, though their relationships deteriorated over the years. The Saudi kingdom now aligns with Russian and Chinese interests, two of the US’s most powerful rivals.
China is the largest buyer of Saudi oil and is more than happy to discuss a price reduction for itself while increasing Western prices. With the inclusion of Saudi Arabia into the BRICS, the kingdom wishes to ditch the US dollar for offshore oil trading.
The oil war between the West and the East is lighting up. And, for the moment, the West is losing.
