Why oil’s ‘big three’ just got bigger: Saudi Arabia, Russia and the US are still calling the shots

1 / 2
Saudi Arabia’s Oil Minister Khalid Al-Falih talks to journalists at the beginning of the OPEC meeting in Vienna. (Reuters)
2 / 2
Power play: The US influence on OPEC’s Vienna summit was all-pervasive as delegates from member states grappled with the question of substantial output cuts in pursuit of stable crude prices. (AFP)
Updated 10 December 2018

Why oil’s ‘big three’ just got bigger: Saudi Arabia, Russia and the US are still calling the shots

  • Events at the OPEC meeting in Vienna two years ago constituted a profound shift in oil policy.
  • The eternal triangle — Saudi Arabia, Russia and the US — will continue to dominate the global energy business for the foreseeable future

DUBAI: The meeting of the Organization of Oil Exporting Countries (OPEC) in Vienna last week confirmed what some in the oil industry have been saying for a while: A new global energy dynamic is being created by the three-way relationship between Saudi Arabia, Russia and the US.
After a first day of deadlock over the output reduction needed to stabilize global crude prices, it took a second-day intervention by Russia to back up Saudi calls for a substantial cut, which was duly delivered.
That brought to a conclusion probably the most controversial OPEC meeting of recent times, with a crop of geopolitical factors — Qatar’s planned withdrawal from the organization, sanctions on Iran and the threat of global trade wars — all in evidence.
Although the Americans were not formally in attendance at Vienna — being neither members of OPEC nor the amorphous “OPEC+” that includes Russia and some other oil producers — their influence was all-pervasive. As the new holders of the title of “biggest producers in the world,” the US reaction was on everybody’s mind in Vienna as they calculated the output reduction needed to halt a worrying slide in prices.
Dubai-based energy expert David Hodson, managing director of Blue Pearl Management, said: “Saudi Arabia dominates OPEC, but without Russia, OPEC is not nearly as relevant. And the US industry has proved it is getting better and better. Those three producers are calling the shots worldwide.”
But in many ways, it is simply the modern oil industry’s eternal triangle. Imperial Russia was the first to develop the industrial use of oil as a fuel resource, drilling what is recognized as the first oil well in the 1840s in the Caspian region.
The Americans followed soon after, first in the eastern US and, later, in Texas and California, as oil fueled the transport revolution of the early 20th century, especially with advent of the internal combustion engine.
Saudi Arabia came along relatively late, with the first serious discovery in 1938 by what would become Saudi Aramco. But by the 1970s, the Kingdom was the biggest producer in the world and able to dominate the global industry via OPEC.
However, the dynamic of that three-way relationship has been radically altered in recent years by the emergence of the US shale industry. From mega-fields such as the Permian Basin in Texas, American technological know-how and financial resources have combined to extract oil in high numbers from areas previously deemed uneconomic.
That has made the US the current biggest oil producer in the world, and a net exporter of oil for the first time in 75 years. As a result, the US has a vital interest in what happens in global energy markets, especially under a president like Donald Trump, who is keen to keep US voters happy with cheap fuel for their cars.
Now those three produce more oil between them than the rest of OPEC combined, and are able to decide the price of oil by opening or closing the taps at will. The challenge, however, is that the will of three independent sovereign states rarely acts in unison. Each has the interests of their populations to consider, as well as the role they play in the “great game” of global politics.
Events at the OPEC meeting in Vienna two years ago constituted a profound shift in oil policy. There, for the first time, Russia and Saudi Arabia masterminded the “declaration of cooperation” aimed at halting the fall in oil prices that had begun in 2014. Khalid Al-Falih, the Saudi energy minister, developed a close working relationship with his Russian counterpart, Alexander Novak.
That relationship was endorsed at the highest level in March this year when Saudi Crown Prince Mohammed bin Salman took time out from a tour of the US to further strengthen “cooperation” with Russia over oil.
“We are working to shift from a year-to-year agreement to a 10- or 20-year agreement,” the crown prince said. “We have agreement on the big picture, but not yet on the detail.”
In Vienna last week, that detail was becoming clearer. OPEC members and their non-OPEC allies agreed to cut 1.2 million barrels of oil per day from their total output, with OPEC cutting the lion’s share of 800,000 barrels, Saudi Arabia taking the lead role in those reductions, and Russia expected to account for most of the balance.
The cuts deal proved there is plenty of market power in the Saudi-Russia alliance. Ellen Wald, US academic, consultant and author of recent book “Saudi, Inc.,” tweeted: “OPEC is still relevant, though not without Russia.”
The price of benchmark Brent oil jumped 5 percent on the news, well back above the $60 mark, with some experts forecasting a steady climb up to $70 in coming weeks. It lost some of those gains later, but at about $62 per barrel, the apparently inexorable decline of recent weeks has been reversed.
If the oil price continues to rise, that would appear to have accomplished the goals of the Saudi-Russian move. Both countries rely on crude exports for a large part of their foreign earnings, though Russia’s more diversified economy means that it has a lower “break-even” level than Saudi Arabia, where oil makes up a bigger proportion of state revenues.
Higher oil prices are good for the Saudi economy, of course, but it is not a clear-cut equation. Policymakers have to calculate the overall financial effect of a reduction in volume of output, even if at a higher price. Selling less at a higher price is not always straightforward mathematics, and some experts think the oil-dependent economies of the Gulf might lose out in aggregate because of the cuts agreed in Vienna.
Capital Economics, a London consultancy, said: “The OPEC deal means weaker growth in the Gulf in 2019,” and reduced its forecast for growth in gross domestic product next year, which would affect the ability of regional governments, including Saudi Arabia, to provide stimulus to the non-oil economy.
Whatever the domestic economic effects, the Kingdom and Russia have struck their deal, for at least the next six months. But perhaps the most intriguing questions are now in the third point of the triangle — the US, the newly crowned oil pumping kings of the world.
Complicating the US response is the relationship between the Trump administration and Saudi Arabia’s leadership. The US president was quick to thank the Kingdom when oil prices fell recently. How will he react if they begin to creep back to or above $70 a barrel?
American oil is being pulled by different economic and political forces. The president wants to keep gasoline prices as low as possible to woo consumers, but the US oil industry wants to maximize profits. Oil at $70 per barrel will be an incentive for US shale producers to boost the all-important “rig count” in places such as Texas and New Mexico.
David Hodson said: “Trump will continue tweeting about the need for lower gas prices, but the US shale industry is driven by commercial considerations, not elections. At the end of the day, rising prices will just be a bigger incentive for them to get on the rigs and pump it out.”
The eternal triangle — Saudi Arabia, Russia and the US — will continue to dominate the global energy business for the foreseeable future. But it may not always be an equilateral affair.


Cirque du Soleil walks a tightrope through pandemic

Updated 06 June 2020

Cirque du Soleil walks a tightrope through pandemic

  • Suitors wage backstage battle to rescue debt-stricken Canadian circus icon
  • Among the potential bidders is former fire eater Guy Laliberte, who fouded the acrobatic troupe in 1984

MONTREAL: Its shows canceled due to the COVID-19 pandemic, an already heavily indebted Cirque du Soleil’s fight for survival has invited an intense backstage battle to try to save the Canadian cultural icon.

High on a list of potential suitors is former fire eater Guy Laliberte, who founded the acrobatic troupe in 1984 but later sold it.

“Its revival will have to be done at the right price. And not at all costs,” said the 60-year-old, determined not to see his creation sold to private interests.

The billionaire clown said after “careful consideration,” he decided “with a great team” to pursue a bid, but offered no details.

Under his leadership, the Cirque had set up big tops in more than 300 cities around the world, delighting audiences with contemporary circus acts set to music but without the usual trappings of lions, elephants and bears.

Then the pandemic hit, forcing the company in March to cancel 44 shows worldwide, from Las Vegas to Tel Aviv, Moscow to Melbourne, and lay off 4,679 acrobats and technicians, or 95 percent of its workforce.

Hurtling toward bankruptcy, the global entertainment giant and pride of Canada commissioned a bank in early May to examine its options, including a possible sale.

Meanwhile, shareholders ponied up $50 million in bridge financing for its “short-term liquidity needs.”

Laliberte, the first clown to rocket to the International Space Station in 2009, ceded control of the Cirque for $1 billion in 2015.

It has since fallen into the hands of American investment firm TPG Capital (55 percent stake) and China’s Fosun (25 percent), which also owns Club Med and Thomas Cook travel. The Caisse de depot et placement du Quebec (CDPQ) retains the last 20 percent.

The institutional investor, which manages public pension plans and insurance programs in Quebec, bought Laliberte’s last remaining 10 percent stake in the business in February, just before the pandemic.

Since 2015, the Cirque has embarked on costly acquisitions and renovations of permanent performance halls, while its creative spirit waned, according to critics in the Quebec press.

Meanwhile, it piled on more than $1 billion in debt.

Fearing that the Cirque would be “sold to foreign interests,” the Quebec government recently offered it a conditional loan of $200 million to help relaunch its shows as restrictions on large gatherings start to be eased worldwide.

But the agreement in principle is conditional on the Cirque headquarters remaining in Montreal and the province being allowed to buy US and Chinese stakes in the company at an unspecified time in the future, “at market value” and with “probably a local partner,” said Quebec Minister of the Economy Pierre Fitzgibbon.

“The state does not want to operate the circus, but the circus is too important to Quebec (to leave it to foreigners),” he said.

In addition to Laliberte, other prospective buyers include Quebecor, the telecoms and media giant of tycoon Pierre Karl Peladeau, whose opening lowball bid was outright rejected.

“It is essentially the value and reputation of the brand” that has piqued interest in the company, says Michel Magnan, corporate governance chair at Concordia University in Montreal.

But “as long as there are restrictions on gatherings of people, the future is not very rosy” for the Cirque, he said.

Several challenges await, according to Magnan.

“There were a lot of people working in all of these shows. Where are they now? What are they doing? How are they doing? In what shape are they, what state of mind?” he said.

“The more time passes, the more this expertise risks evaporating.”

Small consolation: The Cirque resumed its performances on Wednesday in Hangzhou, China, five months after a coronavirus outbreak in the city.