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Analysis: Moscow and Riyadh grow closer

By JOHN C.K. DALY, UPI International Correspondent   |   July 24, 2008 at 7:36 PM   |   Comments

WASHINGTON, July 24 (UPI) -- U.S. consumers, battered by a year of record-high fuel prices, at least can take solace in the fact that Saudi Arabia, the world's largest oil producer, is firmly in the American camp.

Or maybe not. On July 14, during a meeting in Moscow little reported in the foreign press, Interfax reported that Saudi Arabian Secretary-General Prince Bandar bin Sultan bin Abdulaziz and Russia's VTS (Military-Technical Cooperation) agency head Mikhail Dmitriev, in the presence of Prime Minister Vladimir Putin, signed "an agreement about military-technical collaboration."

As the United States has been Saudi Arabia's primary arms supplier for the last three decades, the announcement must have sent CEOs of the military-industrial complex spinning. For the last decade Saudi oil money has purchased nearly $1 billion annually in arms, and a year ago Washington announced the sale of $20 billion worth of advanced weaponry to Saudi Arabia and its fellow Gulf Cooperation Council members.

But if the announcement set alarm bells ringing in defense corporate boardrooms, a second brief announcement later the same day had even greater potential import for the world energy market, as Interfax quoted Bandar bin Sultan as remarking, "Both Russia and Saudi Arabia agree upon and understand each other in virtually every energy-related issue."

The fact that Russia and Saudi Arabia are running neck-and-neck for the position of the world's No. 1 and No. 2 oil exporters and between them are responsible for 19.2 million barrels per day of the world's 86.8 million bpd output, or 22 percent of the world's present consumption, should focus attention worldwide. For comparative purposes, according to the U.S. Energy Information Administration, the Organization of the Petroleum Exporting Countries, current whipping boy of governments deflecting consumer anger over record high-prices, accounts for 35.6 percent of world oil production and about two-thirds of the world's proven oil reserves. There are currently 12 OPEC members, of which Saudi Arabia is one.

The statistics are sobering -- Russia and Saudi Arabia, who "agree upon and understand each other in virtually every energy-related issue," control nearly a quarter of the world's current oil output.

According to Russian Energy Ministry statistics, last month Russia produced 9.77 million bpd, up from 9.74 million bpd in May, but a 0.8 percent decline from its June 2007 9.85 million bpd output. Earlier this month Saudi Arabia announced it would increase its July output to 9.7 million bpd from June's 9.45 million bpd output.

Perhaps nothing epitomizes Riyadh's changing relationship with Washington than, following a May visit by U.S. President George W. Bush, Saudi Arabia increasing daily production by a paltry 200,000 bpd, or 3.3 percent. Despite seeking Saudi succor, Bush and his administration were in part responsible for the surge in prices. As oil is still primarily traded in the American currency, the weaker dollar has been driving up oil prices as investors have been using the commodity as an alternative to holding declining dollars.

Notwithstanding Bush's entreaties, on June 15 Saudi Arabia announced it would boost output to 9.7 million bpd in July, a 600,000 bpd increase since April, which according to EIA data would raise Saudi crude output to its highest monthly rate since August 1981. Saudi Minister of Petroleum Ali bin Ibrahim Al-Naimi said Saudi Arabia plans to increase its total production capacity to 12.5 million bpd by the end of 2009, and could eventually expand to 15 million bpd if required.

One of the more intriguing aspects of Riyadh and Moscow's new love affair is how it might affect Saudi Arabia's relationship with OPEC, which it joined in 1960. Saudi Arabia alone possesses 21.9 percent of the world's proved reserves. Nevertheless, Saudi Arabia, like other OPEC members, is given an allocation determined by the organization; Riyadh's June OPEC "output target" (OPEC no longer uses the politically laden term "quota") was 9.45 million bpd of OPEC's 32.47 million bpd total. Alone of OPEC's members, Saudi Arabia could simply bypass its assigned OPEC "output target" and unilaterally pump an additional 500,000 bpd of production without anyone really talking about the death of the OPEC quota system, because virtually every other member is producing at its maximum capacity. It may be that Riyadh is coming to the conclusion that OPEC has outlived its usefulness, and establishing a common policy is far more difficult among 13 members than with a single partner with whom you share identical views on "virtually every energy-related issue." A closer relationship with Russia offers Saudi Arabia many opportunities that OPEC does not, as most of them have oil and little more, while Russia has a well-developed autarkic economy, able to supply Saudi Arabia with everything from food exports to weaponry.

For Bush, the recent Saudi-Russian agreement must come as a shock on a personal level, as Bandar is the architect pushing for closer bilateral relations. Bandar served as the ambassador of the Kingdom of Saudi Arabia to the United States from Oct. 24, 1983, to Sept. 8, 2005, and grew so close to Presidents George H.W. and George W. Bush that he acquired the nickname "Bandar Bush." Apparently Bandar's priorities have shifted since he left the banks of the Potomac. Ditto those of Bush's buddy Putin, whom he labeled "Pootie-poot." With the burgeoning Saudi-Russian relationship, it seems unlikely that Bandar Bush and Pootie-poot are likely to get further invitations to Crawford or Kennebunkport anytime soon. Ironically, for the average motorist reeling with sticker shock from filling his car, there soon may come a day when he looks back on OPEC with some nostalgia as a price corrective mechanism. After all, when Bush became president eight years ago, oil was $20 a barrel, and OPEC's influence was greater than it is now.

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