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Forget About Oil Wars for Some Time

OPEC reached an agreement to freeze oil production and stabilize prices, but if Saudi Arabia hopes to exert pressure on Washington, it will be disillusioned, Danila Bochkarev, a fellow with the Brussels-based EastWest Institute told valdaiclub.com.

What does the OPEC agreement to freeze oil production mean for the energy market?

The agreement to freeze oil production reflects Saudi Arabia’s concern about low oil prices, which have a negative impact on the budget deficit in the kingdom and on the ability of energy companies to invest in oil production and refining. In 2016, the Saudi budget deficit will reach $87 billion, while GDP growth will be reduced to 1%. In the period from August 2014 to August 2016 the kingdom currency reserves decreased by 24% (or $182 billion).

Moreover, in September there was a reduction of salaries of civil servants, reduction of benefits and social packages. Such measures were taken as part of a plan to reduce budget expenditures.

Importantly, the agreement is also beneficial to Moscow. Russia's budget deficit for 2016 is expected to reach about 3.3% of the GDP, and rising oil prices will help reduce the growing gap between revenues and expenditures of the state budget.

How have the OPEC countries managed to change the position of Iran, which was the main obstacle to such an agreement (Tehran intended to increase oil production to 4 million barrels a day)?

Iran seems to have agreed to make partial concessions, both for political and economic reasons. Tehran decided not to aggravate relations with Moscow and Riyadh, and perhaps agreed to reduce the oil production growth and delay its approach to the level of 4 million barrels a day. Iran is also interested in higher oil prices, while the redistribution of the world oil market is nearing completion.

Can we talk about gradual formation of a common position of oil producer countries? Can the recent agreement between Russia and Saudi Arabia to stabilize oil prices be part of this process?

This situational alliance between Russia and major OPEC players is aimed at maintaining oil prices, possibly at around $60 per barrel. When this aim is achieved, the alliance will break up. To some extent, it reflects interests of all oil producers, including US companies which are involved in shale oil production and are suffering from low oil prices.

Was Saudi Arabia’s position influenced by the fact that the US Congress overrode presidential veto of the bill giving the families of 9/11 victims a chance to sue Riyadh? Can you say that Saudi Arabia is moving towards a more rigid policy vis-à-vis Washington, which will also involve energy leverage?

When you have overproduction of oil, it is almost impossible to use it as an "energy weapon". Due to the rapid growth of shale oil production, the United States reduced the import of "black gold", even despite low oil prices. In 2005, the US imported more than 12.5 million barrels a day on the average, while in 2015 it was only 4.65 million barrels (including 1.06 million from Saudi Arabia – this is special heavy oil which is shipped to refineries in Texas, built specifically for the processing of this type of raw material).

Generally, these events reflect the gradual reversal of Washington from its main ally in the region, Saudi Arabia, towards Iran, which it considers a more promising player.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.