The main shifts in the oil price over the last decade have all been driven by geopolitics, and not by the forces of supply and demand in international financial markets. In 2014, the discipline of the OPEC cartel broke down in what was widely perceived as an attempt to punish shale operators by bringing crude to a level that they couldn’t operate profitably; in 2020, another breakdown reflected Saudi Arabia falling out with Russia; and the invasion of Ukraine evidently triggered the spike early last year.
The latest rally also owes much to geopolitics — this time, the alliance between Saudi Arabia and Russia that veteran oil analyst Jean Ergas of Tigress Financial Partners calls a “Pact of Steel.” The reference to the prewar alliance between Hitler and Stalin is provocative, but this new arrangement is having a galvanizing effect. The US responded to last year’s price spike by drawing on its strategic petroleum reserve, which had been built up for just such a moment. This stopped Russia from holding the western world to ransom over the oil price. But having done so once, the US cannot drain its reserve again. America’s oil inventories are far lower now, thanks to the depletion.
For an insight into the game that Saudi Arabia is playing, I recommend this episode of the These Times podcast, in which the Cambridge academic Helen Thompson asks how worried we should be about this current behavior. In conjunction with the money the kingdom is splashing on sports, from setting up a rival to the PGA golf tour to paying silly money to bring Neymar and Ronaldo to the Saudi league, it’s taking a newly aggressive role in the world. To quote Ergas, the strategy “is about telling the US that we can live without you.” With its new markets to the east and its alliance with Russia, Saudi Arabia has put a floor of about $70 under the oil price.