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29 Jan, 2016 14:15

‘Russia-OPEC oil deal - chances small’

‘Russia-OPEC oil deal - chances small’

An agreement between Saudi Arabia and Russia to cut oil production and stabilize prices is possible, says international development consultant Paolo Liebl von Schirach, although nobody really understands the Saudi game plan over oil prices.

The global oil price has been making a comeback over the past week after sinking to its lowest point in 12 years. This comes amid reports that Russia is pushing for talks with OPEC to coordinate production, and stabilize the market.

RT: Russia's energy minister apparently wants to strike a deal with Saudi Arabia and the rest of OPEC on coordinating oil production. What are the chances that anything will come of this?

Paolo Liebl von Schirach: I think they are rather small. I think we don’t really understand what’s behind Saudi’s policy of keeping production of full throttle and of causing this immense price collapse. There is a lot going on in Saudi Arabia beyond oil policies. There is Iran policy, Gulf policy, policy towards Shia dominated Iraq which is viewed now as an ally of Iran. And last but not least, enormously complicated and ambitious efforts of modernizing Saudi Arabia. Where the oil policy of Saudi Arabia sits in all of this – it is a bit of a mystery. This hasn’t been done before on this scale. And as we know the architect of all these transformations including the oil policies is the Deputy Crown Prince Mohammad, who is 30 years old and rather untested as far as we understand in terms of his ability to control the situation that he may have started without a very clear game plan. My point is that an agreement between Saudi Arabia and Russia to cut the production and therefore stabilize prices is possible in theory. What the Saudi game plan is - it’s anybody’s guess.

RT: Given the amount of pressure that have been put on the Saudis by OPEC members and other states which have all been suffering because of the crisis, do you think the Saudis will have to respond some way to that?

PS: I think it is a possibility. Again, Saudi Arabia itself is paying a very heavy price as we speak for the low oil prices that it has in a sense mandated by keeping production of full throttle of over 10.4 million barrels a day. Saudi Arabia last year ran a deficit of $100 billion. It had to go to capital markets and issue bonds. And all this is mixed with their ambitious attempts to reform public service, to create private enterprises, to float shares in Aramco which is the state oil company. All these things are very complicated and the potential push back and resistance from within Saudi Arabia towards the domestic impact of these policies -we don’t really know because policy making there is not really transparent. But certainly to your point there are many other countries suffering enormously. Think about Venezuela which is essentially bankrupt, think about Nigeria which although oil revenue is not a significant component of its GDP and general revenue, it is still used to rely on it very heavily. Think of Angola, again a major African oil producer. And think of all the other members of OPEC and of course across the world - from Russia to the shale oil patch in the US. Everybody’s hurting…What the game plan of the Saudi Arabia is? And how long will they be able to keep it? It is a really difficult thing to say. This seems to be more of a political play rather than a calculated oil price play.

RT:Saudi Arabia has been the main driver behind the policy of keeping production high and prices low. How long can the Saudis afford to continue this?

PS: This has been calculated before. They had at the beginning of this new trend, so to speak, about $700 billion in cash in reserves. If the depletion rate is about $100 billion a year, the estimate is that they can keep this thing going - unless there are other factors that intervene domestically - for another four or five years but at an extremely high cost. And will there be push back from within the royal family in Saudi Arabia? Will there be some people who would say: “Enough is enough”. That’s difficult to say but if you ask me how long can they keep this thing going - for a significant length of time, but not indefinitely. Because at some point the revenue short fall will come back to bite them.  

RT: If this continues what impact do you expect this to have?

PS: I would say already we can see that certainly here in the US domestically, even though the US as a country is not so heavily dependent on the energy sector but because there have been such a ramp up in production and investments in shale oil, the cut in prices has caused a slew of bankruptcies and companies that retrench go under, we’ve lost about 100,000 jobs. This is definitely hurting the US economy - not in a dramatic way, but in the context of an economy that is not performing so greatly, the loss of the sector that was energy until 2014 certainly hurts the country and most significantly the states in which there’s the most production like North Dakota, Oklahoma, Texas, other such states like Louisiana that are hurt by the depression essentially by recession in the oil sector. And to your larger point, look what is going on. Most of the oil majors have cut estimates for investment. And indeed countries that depend more heavily on oil for revenue generation are really hurting very badly.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.