Oil is the most volatile and significant commodity. Its significance came into light post-World War II and from that time forward the commodity has been the cause for major political and economic events around the world. It is a market driven commodity but, of course, the oil market from time to time is influenced by various groups in maintaining the equilibrium.
OPEC is one such group that, for an extended time, influenced the market together with the U.S. But because of some internal and external factors, its dominance in the sector has decreased, in turn disturbed the equilibrium in the oil world. Making a requirement for a new association, the OPEC plus has been resuscitated for balancing and instilling sovereignty in the oil world. Therefore, to do that, the cooperation between the two superpowers is a necessary trait.
The changing nature in the U.S. oil extraction policy has repercussions at political and economical level in world politics. When the U.S. became the major oil producer, its dependence on oil from other countries reduced, and slowly moved towards self-sufficiency. Its share of oil in the world market is also multiplying. From 2015 to 2019, U.S crude exports leaped six-fold to 2.8 million b/d which was disturbing for the existing system and degrading the impact of other major oil producers like OPEC and Russia, whose economies are based on oil prices. This pushed the two parties to step aside their differences from the past and cooperate. So, OPEC plus was created in 2016.
Now OPEC Plus together holds 55 percent of oil market share and 90 percent of proven oil reserves. Their cooperation had political and economical considerations, their first tangible success was witnessed in 2017, joint reduction in production helped in reviving the oil price, which plummeted in 2014 because of slowdown and a spate of shale oil. OPEC Plus stature in the world oil market brightened, which attracted both the super powers U.S. and China.
The strategy of OPEC plus towards China will be of mutual cooperation as both need each other, considering their interdependence. Being a major oil importer, China is an important client to the cartel which cannot be ignored. The two kingpins of the cartel, Saudi Arabia and Russia, are the major oil exporters to Beijing together they contribute 32 percent. Considering the situation it is evident that both the parties are mutually interdependent. Being a market driven commodity, supply and demand of both the countries are equally important in maintaining stability in the market. So, it will be a wrong hypothesis to say that neither are independent of each other, nor is one more influential than the other.
China is a rising superpower; its obsession with oil is not going to decrease in recent times. In that case, it is in dire need of steady, stable and cheap supply of oil, even though it has diversified energy sources, still oil is significant for its growth and development. China consumed, approximately, 14 b/d in 2019 of which 70 percent is imported from the OPEC plus countries.
Before the OPEC Plus coalition was formed, the Chinese handled their energy needs efficiently, mostly by engaging multiple stakeholders. Its major oil imports were from Russia, Saudi Arabia, Angola, Congo and others. But the coalition broke this strategy because all these countries are a part of the cartel now.
Considering the situation, China has two options either to cooperate with the OPEC Plus or collaborate with the opposition party who are the buyers. China for a very long time tried to collaborate with major oil buyers but unfortunately it never moved further because of two reasons. First, among the top four oil buyers of the world, apart from China, are U.S., India and Japan. And this is the club of countries with whom China’s relations are worse. Second, China has deep rooted economic relations, beyond oil, with OPEC as a whole, and the OPEC countries individually as well. These two reasons pushed China to take the first option that is to cooperate with the cartel which answers the question; why the Middle East is devoid of Chinese aggression.
Similarly the OPEC Plus, the major exporter of the world, cannot be a major exporter if it does not have any market. China is the single largest market for them to woo, and now it has started leading the oil demand. Their demand for oil is also a major factor that drives the oil price which is getting exposed recently. However, the Chinese economic crisis has its own repercussions on the entire oil industry. The recent slowdown by the coronavirus proved this hypothesis. Nevertheless OPEC has always maintained close ties with the country. The OPEC Fund for International Development is investing in Chinese education and health sector on a regular basis. And there are regular bilateral and multilateral discussions between the OPEC Plus nations and China in the form of high level meetings.
The Shale gas boom in the United States altered the country’s energy policy; their surplus oil availability needed a solid market to conduct business. Hence the race towards the oil market was set between the U.S. and OPEC. Their rivalry gradually increased to a whole new level with the formation of OPEC Plus in 2017. Even after the cartel was formed, it still lacked the necessary power to contain the U.S. influence in international oil market. As Washington was using both political and economical means to get its share in the oil market which the cartel lacked. It played a zero sum game through the economic sanctions on some of the OPEC countries like Iran, by which it reduced the market share of OPEC Plus and converted the same as to benefit its own market.
Among the OPEC Plus countries apart from Russia and Iran, most of the other countries are dependent on the U.S. for their national security. Therefore, Russia sometimes fails to cooperate with the cartel. On March 05, 2020, OPEC requested OPEC Plus members to curtail their oil production in order to balance the market and earn profits as well. Since demand was falling, so reducing the supply could keep the prices stable.
Every country on the table agreed to this option except Russia. Russia increased its supply and kept the prices low hoping if the prices remain low this would hit the private companies of the U.S. really hard and would not be able to make profits; and eventually, they would go bankrupt. Russia tried to use this situation as a wild card. But things did not work out as planned since the U.S. was able to sustain even when the oil prices were falling, especially companies like Exxon and Chevron. Russia could not see the ramifications for the decision they took in March, and their attempt to take down US’s shale industry tells why OPEC will need U.S. in not-so-distant future.
But things do not settle here, OPEC still has the ability to alter the world oil prices. The recession, driven by the pandemic, gave us insights into the vulnerabilities of the US. Firstly, in the U.S., if higher oil prices have pros of driving more job creation and investment then it has its own repercussions when the prices drop, the same jobs created by the industry will lead to loss of millions of jobs and other investors who have invested a huge amount in the field will have capital losses which will have domino effect on other industries as well. These negative trends of low oil prices began to rise up in the U.S. oil industry which was considered by the Trump administration as a national emergency, pushed him to mediate a deal between Russia and Saudi Arabia to end their price war and to bring the OPEC Plus back to the table to cut the oil production and help the oil price back to stability.
Finally the pandemic driven recession is a blessing in disguise for OPEC Plus. It pushed the superpowers and the cartel to cooperate with each other. It helped the cartel to establish itself as a formal organisation. But for it to become a sovereign power in the oil world is a long way to go while maintaining the balance between the superpowers. It also needs to work on the member states’ internal disputes, which is a weak spot exploited by the foreign nations for their own benefits.
*About the authors:
- Smriti Lohia is currently pursuing her M.A in International Relations. She holds her Bachelor’s degree in Mathematics and French.
- Haridass Sankar is a budding professional with M.A. in International Relations, established software engineer and an aspiring political analyst.
A similar version was published at The Geopolitics.