The economic alliance between Arabia and Russia has achieved remarkable and sometimes unexpected successes. Contrary to expectations, it increases the price of oil and allows the two leaders of these countries – Mohammed bin Salman and Vladimir Putin – to finance their own projects: the modernization of Saudi Arabia and the war in Ukraine.
The instrument developed by the West within the framework of the G7, which aimed to impose a cap of $60 per barrel on Russian sales, is being bypassed.
The Riyadh-Moscow axis has won its bet so far as deep cuts in crude production reduced supply and pushed up prices. Saudi crude oil export revenue increased by $2.6 billion in the third quarter of this year, +5.7% compared to the April-June period. Russia, in turn, will take in an additional $2.8 billion this quarter.
Forecasts suggesting a fall in crude oil prices linked to weakness in Chinese demand were denied. It is true that economic growth in the People’s Republic of China is sluggish and energy consumption is falling as a result; However, the recession many expected did not materialize in the rest of the world.
The main reason for the rise in crude oil prices is the production cuts agreed between Saudi Prince Mohammed bin Salman and Vladimir Putin’s government. Arabia and Russia are the two dominant nations within the oligopolistic cartel OPEC+, that is, OPEC, which extends to Russia and some of its allies. In October 2022, OPEC+ decided to reduce production by two million barrels per day. This was followed by further cuts of one million barrels per day in May.
In June, Arabia alone made a third cut, removing one million barrels from the market. In September, Riyadh and Moscow announced they would maintain the cuts until the end of the year. In the past, announcements of supply cuts have not always had the desired effect: either due to a lack of discipline (some producers did not implement the promised cuts) or due to lower consumer demand. This time, however, the success was complete: Brent crude oil prices rose by 25% within a quarter, reaching $95 per barrel. The OPEC+ scenarios assume that there will be a global oil deficit of 3.3 million barrels per day in the last half of the year.
Some analysts expect inflation pressures to increase to $100 per barrel and new inflationary pressures to emerge in consuming countries.
For the two leaders of the operation, manna from heaven is essential to the realization of their plans. Prince Mohammed bin Salman is pursuing ambitious projects to modernize his country. The most symbolic and expensive is the construction of a new Saudi city called Neom, an investment of $500 billion. At the end of the work, the Neom megalopolis should cover an area of 26,500 square kilometers (the whole of Sicily has an area of 25,800 square kilometers, Lombardy 23,900). Since Saudi Arabia’s national budget is balanced when the price of oil is at $81 per barrel, a price towards $100 will replenish the treasury to finance the gigantic construction site. Already in the first half of this year, the total volume of Saudi investments increased by 37%.
As for Putin, his government spending rose 35% in the first three months of the year to support the war effort in Ukraine. The aim of the pro-Ukrainian coalition was to limit Moscow’s ability to finance the war by capping the price of Russian crude oil at $60. But this cap does not work: in recent days, Russian Ural oil has been sold for $75. Putin is currently damaging Western economies by expanding restrictions on gasoline and diesel exports and increasing upward pressure on consumer prices.