World Energy Blog

Saudi Arabia and Russia, should we be worried?

7/10/2015 12:00:00 AM

Will a new cold war present itself due to the lack of leadership from the United States and our new found oil production?  In 1976 we signed an agreement with Saudi that avoided any further use of oil as a weapon against the United States in exchange for, among other things, our protection.  Could the Kingdom now be seeking other protectors as our oil production increases and our support of our allies wanes. 

Recently Russian President Vladimir Putin met Saudi Prince Mohammad in St. Petersburg where Saudi Arabia and Russia, two of the world’s leading oil producers, decided to form a working group for joint energy projects. 

“At the end of the year, in October, we will summon a meeting of the intergovernmental commission, which hasn’t operated for five years,” Russia’s Energy Minister Aleksandr Novak said recently at the St Petersburg economic forum. “There are no specific projects in the energy field yet, we only have an agreement to create a working group between our ministry and the Saudi Arabian oil ministry, which, together our companies will work on specific projects,” the Energy Minister told reporters.

After the 1973 embargo, Richard Nixon sent his secretary of state Henry Kissinger to Saudi Arabia with a proposed deal, to ensure that an embargo such as this would never happen to the United States again. 

After some revisions, in 1976, the House of Saud and Henry Kissinger finally reached an agreement. The agreement did the following things, according to Marin Katusa's 2014 book, "The Colder War." The Saudi's agreed to: 

  1. Give the US as much oil as it desired, for general consumption and national security measures. Thus increasing or decreasing oil production to the benefit of the US 
  2. To only sell oil for US dollars, and to reinvest profits in US treasury securities. 

In return, the US guaranteed: 

  1. The protection of the Saudi Kingdom from rival Arab countries 
  2. The protection of Saudi oil fields 
  3.  Protection from an Israeli invasion.

Today things are a bit more complicated.  Yes, the US has been able to increase oil production for the first time in 30 years and it has provided an economic boon to the states that produce it.  However, we have also shown that we are not standing behind our allies.  In fact we have turned on a number of them and either through direct or indirect action caused regime change within their countries.

The Saudi’s have no doubt noticed this… and so has Russia.  Russia has become the number one or number two oil producers in the world (depending on where you count our production) and Saudi Arabia continues to be a top producer.  Unlike Saudi, the Russians don’t have an agreement with the US not to meddle with the price of oil.

It should also be noted that recently Russia has been willing to use its influence to force other countries to bend to its will.  The use of natural gas to bring former satellite countries of the Soviet Union back to Russia was one example; the use of military force to take over Crimea is another.

Between Russia and Saudi Arabia roughly ¼ of the world’s production is directly or indirectly controlled.  We have recently seen that OPEC is losing its influence over price, or is it.  By not reducing production OPEC is directly targeting the US producers and our rig count is down by 50%.  At the same time, by meeting with Russia and beginning an energy partnership they are getting together with a very large and very experienced energy manipulator. 

At the same time, Russia is also a very capable military partner and not a big fan of Israel. Should the Soviets decide to swop partners they could pretty easily fill our shoes and protect the Saudis.  Additionally Russia is much closer to Iran than the United States and can exert more influence over them, potentially securing the Kingdom from any further advances from that direction.

So what do we have here?  If the Saudis and the Russians team up we could be looking at the new oil power brokers (OPEC never had an army to back it up).  In the meantime, the US producers would be subject to our self-imposed embargo and unable to venture out into the world to sell crude.  The Saudi/Russian alliance could drive the price of crude in any direction they wish.  Another major blow could be made to the US economy should they decide to sell oil in rubles instead of US dollars.

At the end of the day, we need to be paying attention to this part of the world, very carefully.  We cannot ignore our allies and we need to project strength or we will find ourselves as the target of an energy war, even more difficult than the one that helped bring down the Soviet Union.  Oh by the way, that was the Saudi’s as well.