Abdullah al-Wandawi is an MA candidate at KCL studying Politics and Economics of the Middle East. His interests lie in security studies and neoliberalism in the MENA region as well as the international relations of Gulf Cooperation Council member states.
"Global crude oil prices remained exceptionally strong in the second quarter of 2022, driven by low crude oil and refined product inventories, and ongoing geopolitical events. These factors… have created extremely favourable market conditions from which Aramco is generating significant value." – Aramco 2022
Saudi Arabia's greatest diplomatic tool is its oil reserves which are exported through the Saudi state-owned company Aramco. Aramco is the world's largest energy exporter and one of the most valuable companies in the world with an estimated net worth of $2 trillion USD (with some estimates placing this figure much higher). The sale of energy contributes to 88% of Saudi Arabia's government revenue, (Cammet et al., 2015: 342) making energy resources Saudi Arabia's most vital asset. This article will examine how Saudi Arabia has benefitted from the rising cost of energy prices and how it is able to consolidate its position in international relations. The writing of this piece comes at an important time as once again Russia cut gas flows into Europe through its Nord Stream pipeline. As the war drags on this will mean that Europe and the United States will seek to deepen ties with the Kingdom which as this article argues, is well placed to take advantage of the West's vulnerability.
Energy prices were on the rise as the world started to recover from the global pandemic, but Russia's invasion of Ukraine became a turning point. The Western world quickly sanctioned Russia and reduced their energy imports from the nation which in 2021 produced 10.5 Mb/d, only second to the United States (Finley and Krane, 2022: 4). As a result, the sanctions on Russian energy have been a significant factor in the surging inflation across many parts of the world. While the United States is the largest producer of oil it is also the world's largest consumer and continues to import oil that is better suited for its refineries than its own shale oil. Furthermore, any investments in the United States' domestic oil production would take perhaps years to offset the loss of Russian energy imports which in 2021 amounted to 700,000 b/d (Finley and Krane, 2022: 4-7). Russia's importance to the global energy supply is such that even if OPEC nations with spare production capacity chose to offset the loss in Russian energy, their stocks would rapidly deplete (Finley and Krane, 2022: 4). To add to this, the sanctions imposed on Russia has meant that there are now fewer suppliers of energy that the Western World is willing to do business with - Iran and Venezuela are also two major energy producers that are under heavy western sanctions. This means that the West was desperate to find new suppliers of energy with Ursula von der Leyen making otherwise eyebrow-raising trips to the Middle East and the Caucasus region to make energy deals with: Egypt, a regime accused of countless human rights abuses by the West, Israel, an apartheid state according to Amnesty International and Human Rights Watch, and Azerbaijan a hereditary dictatorship. Collectively these nations cannot match close to even 10% of Russia's output to Europe which in 2021 supplied 155 billion cubic metres of gas to the EU, whereas Azerbaijan supplied just 8 billion (rising to 12 billion under the new agreement by 2023). Amid Europe negotiating for scraps, energy prices surged following Russia indefinitely cutting gas from the Nord Stream 1 pipeline on Friday 2nd of September, thus causing the Euro to drop to a 20 year low against the dollar and reflecting investor confidence. Yet, while it is all doom and gloom for some, others have been revelling in the chaos.
Already in the second quarter of this year, Aramco produced record breaking revenues. While not explicitly mentioning the war as a factor, Aramco themselves have reiterated in their latest biannual report that geopolitical events have "created extremely favourable market conditions" (Aramco, 2022: 7). This is clearly in reference to the crisis in Eastern Europe. The invasion has allowed Aramco to consolidate and expand its position as the world's largest energy exporter earning over $48 billion in the second quarter of 2022, $23 billion more than in the same quarter of 2021 (Aramco, 2022: 9). According to Bloomberg, Aramco "had the biggest quarterly adjusted profit of any listed company" (Al Othman and Di Paola, 2022). Therefore, when it comes to dealing with the West, Saudi Arabia has found itself in an incredibly advantageous position. Oil revenues are incredibly important to Saudi Arabia as the nation's economic system relies upon huge amounts of government revenue to be spent on Saudi citizens in the form of welfare to fund healthcare, education, housing, and to pay the above market wage salaries for underproductive government jobs in a deliberately oversized public sector. Thus, Saudi Arabia's economic model has come under heavy stress when the price of oil drops, as demonstrated during global recessions or the 2014 oil price slump. Fortunately for Saudi Arabia, the 21st century has witnessed the rise of China and other Asian nations which have become thirsty for energy to fuel their rapidly growing economies. Saudi Arabia sees no reason to switch its supply back to the West when more reliable and increasingly dynamic economies which can better withstand global economic shocks are able to purchase its abundant yet finite reserves of energy. This has led to Saudi Arabia pivoting its economic relations eastward and now Asian economies account for well over 70% of Saudi Arabia's export market. In effect, the U.S. has gone from the Kingdom's biggest buyer up until the financial crisis to its 6th largest in 2020, with China now being Saudi Arabia's most valuable customer (OEC, 2022).
China and Saudi relations are built upon mutual economic priorities. China is able to facilitate Saudi's key goal of economic diversification through its Belt and Road Initiative. As the short-term priority of the Kingdom is to maintain its expensive welfare system, economic diversification is difficult to achieve when oil prices are low. Yet the rising energy prices now means that Saudi Arabia can focus on economic diversification. Furthermore, because the Kingdom is warming relations with Israel, the main ally of the United States in the region, the U.S. will continue to guarantee the security of Saudi Arabia.
Consequently, Saudi Arabia has and will continue to pursue its economic interests and ignore calls from the U.K. and the U.S. to increase its energy supplies to satisfy demand and reduce oil prices. In fact, the Guardian reported on the 5th of September that OPEC discussed reducing oil production further by 100,000 b/d (Wearden, 2022) highlighting Saudi Arabia's current confidence on the international stage. Therefore, it is likely that Saudi Arabia will take advantage of the Nord Stream's indefinite shutdown as well as future shutdowns by continuing to import even more Russian crude oil at below market prices for domestic consumption, to then export its own crude oil at inflated prices and by extension maintaining a longer lasting supply of energy. Therefore, the oil reserves of Saudi Arabia have become a priceless bargaining chip against the West as Europe and North America have no level of monopsony power over Saudi energy supply and because Saudi Arabia continues to play a vital role as a U.S. security pillar. This means that Saudi Arabia's energy supply - which feeds 13% of the globe's daily energy needs (Weijermars and Al-Shehri, 2022: 7) - can continue to mainly head eastward. Furthermore, while the Biden administration may have made a well-publicised trip to Saudi Arabia, this comes after 16 months of cold-shouldering. In that time (and even beforehand) Middle Eastern countries that were once strict allies of the U.S. have opened up to increasing Chinese and Russian influence, showing that U.S. foreign policy has only weakened its position and strengthened Saudi Arabia's in a time of Western crisis. In essence, increasing oil revenues due to a shortage of supply has meant that Saudi Arabia is able to follow a strategy which, at least at this moment, makes the nation a much stronger player in international relations.
Image credit: https://www.aljazeera.com/news/2020/10/13/human-rights-council-election
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