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Explained: Why Saudi Arabia is siding with Russia and refusing to hike oil output

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Explained: Why Saudi Arabia is siding with Russia and refusing to hike oil output

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Saudi’s refusal to pump up oil output, while adding to Russia’s forex kitty, will further fuel US inflation and put a question mark over European sanctions on Russia in view of the Ukraine crisis.

Explained: Why Saudi Arabia is siding with Russia and refusing to hike oil output

As the Russia-Ukraine border continues to remain tense, one of the United States’ foremost allies is refusing to give in to its demands. Despite repeated calls from the US, Saudi Arabia has said no to increasing its oil production, a move that is directly benefiting the Russian state and hurting the American economy.

Tensions between Ukraine and Russia, which is the world’s second-largest producer of oil and the largest supplier of natural gas to Europe, have led to prices of crude inching towards $100 a barrel.

What does this mean?

In an energy industry conference in Riyadh on February 16, the International Energy Agency (IEA) had called on the Kingdom of Saudi Arabia to increase its production of crude oil in order to stabilise oil prices in the international market. The conference was held after US President Joe Biden had last week called Saudi King Salman bin Abdulaziz Al Saud to talk about issues, including “ensuring the stability of global energy supplies.”

Despite both calls, Saudi Arabia has refused to increase its production levels, citing its commitments to the Organization of the Petroleum Exporting Countries Plus Group (OPEC+). The OPEC+ group represents 13 member states plus Russia, containing over 44 percent of global oil production and 81.5 percent of the world's ‘proven’ oil reserves.

The group has a strong influence on global oil prices. It sets production and quotes for each member state to prevent price wars. The oil production deal came about in 2016, after years of price wars.

How this will impact US and Russia?

For Russia, higher oil prices mean that the country’s economy will be able to weather the impact of any potential sanctions that will be imposed in case of any invasion or incursion into Ukraine. The higher oil prices will increase Russia’s forex reserves and provide support for the rouble.

At the same time, higher oil prices are also driving the record-high inflation in the US. The high prices will also impact the options that the US and other Western allies have in terms of imposing sanctions on Russia.

With Saudi Arabia choosing to stick to its current production levels, Russia will, at least for the short term, will have the edge.

Saudi Arabia is currently producing 10 million barrels a day against its quota of 12 million barrels a day. The kingdom has the capacity to ramp up its production by a factor of 400,000 barrels a day, which would mean that it would take around three months to reach full production capacity.

Not political, but economic choice 

While many are painting the choice as a diplomatic one, especially in the backdrop of growing Russia-Saudi cooperation in recent years, it may not necessarily be the only factor driving Saudi Arabia’s decision.

Saudi Arabia’s reluctance may be partly because the country believes that the current increase in prices is merely a result of speculation of a conflict in Europe. A recent OPEC report highlighted that there was already a potential global surplus of 1.4 million barrels a day in the first quarter of the year, which may stoke fears of a future supply glut.

But it cannot be ruled out that Saudi Arabia has also enjoyed greater cooperation with Russia in multiple spheres in recent years. They had signed a military cooperation agreement in August 2021, which was “aimed at developing joint military cooperation between the two countries.”

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