Saudis sink oil deal, deepening geopolitical and economic crisis

In one of the most anticipated summits of oil-producing states in decades, representatives from nearly 20 countries from three continents met in Doha, Qatar April 17. This included members of the OPEC alliance as well as those outside the organization. They failed to reach an agreement to cut or freeze production to boost oil prices.

There have been calls for such a course of action since oil prices began an unprecedented freefall in late 2014. A barrel of oil crashed from a high of over $100 dollars to settle at a floor of about $30.

Most major oil-producing countries have suffered under colonial rule, and many are still under the economic domination of the imperialist powers of Western Europe, North America and Japan. The oil producers are dealing with the legacy of underdevelopment – the suppression of a country’s economic potential in favor of the needs of monopolies in the imperialist states.

Underdeveloped nations were prevented from building a diversified economy, integrated into world capitalism instead on the basis of resource extraction in just one or a few sectors. As a consequence, oil revenues account for the bulk of many governments’ budgets – and oftentimes even the country’s gross domestic product.

Since oil prices entered their freefall, spending has been slashed, currencies devalued and reserves strained. The world’s major producers are fractured along fiscal and political lines, with those countries least able to afford to weather the collapse seeking to build consensus for a cap on production.

Low oil prices have had little positive effect on poor and working people outside of the oil-producing states. Despite initial hopes of a stimulus, the underlying trend of capitalist stagnation remains dominant.

This diplomatic effort first bore fruit in February, when a mini-summit of Russia, Saudi Arabia, Qatar and Venezuela led to an agreement in principle to freeze oil output at January levels. This set the stage for the Doha summit, which ultimately failed to build on February’s success.

The impasse among producer states is a consequence of the collision between a ruthless battle for market share in the global energy trade on the one hand, and increasingly bitter diplomatic divides in a geopolitical map that is being scrambled in the face of declining U.S. imperialist hegemony on the other.

Economic factors

Oil was at historic highs, in the neighborhood of $140 a barrel, prior to the Great Recession. The price fell sharply as the world economy descended into crisis, but spiked back up in the following years and held steady above the $100 mark.

This was made possible by a rebound in industrial production and construction in the emerging economic powerhouses of the world, even as the core imperialist countries of the west remained mired in stagnation. But these countries pursue economic development using capitalist methods, meaning that every period of expansion is followed by contraction. Growth has slowed down dramatically in Brazil, China and South Africa, among others, while demand in the wealthiest countries remains depressed by austerity and inequality.

The underlying trends of global capitalism are largely out of the hands of the major oil producers, but they also faced a threat that they could do something about – the explosion of hydrocarbon production as a result of the exploitation of shale (“fracking”). In the United States, oil production increased by 64 percent from 2008 to 2013, and gas production increased 42 percent from 2005 to 2013. Shale production in Canada, Argentina and China also contributed to this flooding of the world energy market, as did the prospect of the exploitation of the large shale gas reserves of Algeria, Australia, Colombia, Mexico and Russia.

Normally, oil producers would cut output to reduce global supply and boost prices. But seeing the potential for the “shale gas revolution” to permanently rearrange the world energy market, a bloc led by Saudi Arabia decided to take another route. They would maintain their production levels and endure the unfavorable situation for an extended period of time in order to push prices past the “break-even point” – the price below which production is unprofitable – for the shale producers.

This strategy hit a brick wall of debt. In order to set up the rigs and build the necessary infrastructure to begin to exploit shale, corporations took on tremendous amounts of debt. Over the past decade, outstanding corporate bonds in the oil and gas sector spiked by about one trillion dollars – increasing from $455 billion in 2006 to $1.4 trillion in 2014.

Shale producers are forced to operate at razor thin profit margins, or even at a loss, because of their obligation to service their debt. They have to pay interest to the banks and financial institutions, and as a result cannot cut production enough to significantly boost prices. The energy market remains flooded.

Geopolitical factors

The overarching foreign policy objective of the Saudi regime is isolating Iran and preventing it from establishing normal relationships or alliances with other countries in the region. Saudi intransigence in Syria and its military aggression in Yemen are expressions of this. This is even more so the case now that the Joint Comprehensive Plan of Action – the so-called Iran nuclear deal – is beginning to be implemented.

The JCPOA is a signal that the Obama administration recognizes that U.S. imperialism cannot dictate the course of events in the Middle East like it used to, and desires at least in the short term a working relationship with Iran. This move away from the traditional U.S. approach is taken as an existential threat by the Saudi monarchy.

Iran is attempting to maximize the benefits of the sanctions relief it secured with the JCPOA. It is in a position to sell much more oil on the world market, now that a great many restrictions on economic relations with Iran have been lifted.

Iran’s economy has been badly affected by the sanctions, and to recover quickly it needs both an increase in domestic production and a spike in global prices. The government makes the case that they are dealing with special circumstances – aggression from a U.S.-led bloc of imperialist countries – and so a special arrangement should be made in terms of their production quota.

There is clearly logic to this position, but the Saudi leadership is in no mood to do Iran any favors. Saudi Arabia insists that Iran would have to cap production at levels before sanctions were lifted if it is to agree to any deal between oil producing states.

The Iranian government announced that it would send a representative to the Doha summit. However, no delegation ever arrived. This was a clear signal that the summit would fail to secure a deal.

Although not an OPEC member, Russia attended the Doha summit and is one of the strongest voices in favor of a production freeze. The Russian economy, while not a product of underdevelopment, is driven in part by hydrocarbon exports and has been battered by the decline in prices. The counter-revolution that saw the chaotic return of capitalism to Russia signaled the end of central economic planning that built a diversified economy able to withstand the ups and downs of the world commodity markets.

Russia’s situation is compounded by sanctions imposed by the western imperialist states as part of the Ukraine crisis. Following the U.S.-orchestrated coup that installed a far-right regime in Kiev, parts of eastern Ukraine declared independence, which Russia is accused of backing.

Hypocritically claiming to punish Russia for infringing on Ukrainian sovereignty, the United States and European Union have imposed restrictions on various Russian exports and frozen the assets of important political and business figures. The Russian currency has depreciated and the country’s reserves are dwindling, making lucrative exports that generate foreign currency all the more important.

The country’s support for the government in the Syrian civil war, especially the turn to open military intervention, earned it the enmity of the Saudi ruling class. The Saudi government is quite pleased that its strategy is causing further economic distress for Russia, which mitigates its willingness to risk getting bogged down in Syria.

Returning from Doha, Venezuelan Oil and Mining Minister Euologio del Pino accused the U.S. government of sabotaging the summit. Low oil prices are an essential condition for the success of the Venezuelan right wing’s economic war on the revolutionary government, an effort fully backed by U.S. imperialism. A U.S. client regime, the Saudi monarchy and Venezuela’s Bolivarian Revolution find themselves on opposite sides of almost all substantive international issues.

The Venezuelan government is fully aware of the damage that fossil fuel emissions do to the environment. Even while it is in the process of building an ecologically sustainable, socialist model of growth, it cannot dispense with oil overnight. The revolution can only realistically hope to overcome the legacy of underdevelopment by wielding the country’s vast oil reserves in the interests of the working class majority.

With the global economy still weak, and approaching the period when history suggests it will suffer its next cyclical crisis, there are no indications that the oil market will recover on its own volition anytime soon. With most other major producers amendable to an output freeze, the Saudi regime appears to hold the key to an agreement to boost the price of oil. What remains to be seen is how firmly this position will hold despite economic and political pressures to the contrary.

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