Petropolitics: two poles of OPEC

President Putin’s recent moves in the Middle East — to shore up Bashar al-Assad’s regime in Syria through deployment of combat aircraft, equipment, and manpower and build-out of air-, naval-, and ground-force bases, and the agreement in the last week with Iran, Iraq, and Syria on intelligence and security cooperation—could contribute to Russian efforts to combat the myriad negative pressures on Russia’s vital energy industry.

Read: Oil geopolitics

Following the Russian return of Crimea, The European Union is now even more determined to reduce its dependence on Russia for natural gas and to force Gazprom submit to EU competition rules. Europe has sought and continues to seek alternatives Russian natural gas (among them, U.S. LNG and Iranian pipeline and/or LNG). The European Commission, the European Union’s executive body, has refused to bless Gazprom’s proposed 55 bcm/year Nord Stream 2 natural gas pipeline project, citing existing surplus Gazprom pipeline capacity into Europe and insufficient future demand for Russian natural gas. Also, the EU Commission in April charged Gazprom with violating the EU’s anti-trust laws for anti-competitive practices and unfair pricing in Central and Eastern Europe. If found guilty, Gazprom could face substantial fines of around $1 billion. Even if Gazprom avoids fines and manages to reach a settlement with the EU, as it hopes to do, its European market share and pricing will remain under pressure into the future.

Putin’s moves in the Middle East could help Russia address the impact of these threats to the Russian energy industry. They potentially enhance the attractiveness of Russian crude and natural gas supplies compared to those from Saudi Arabia and its Gulf Arab allies.

Putin’s moves also are strengthening Russia’s influence with OPEC. Russia already has extensive and close ties with Iran and Venezuela, and is now laying the basis for such ties with Iraq. Putin has aligned Russia with OPEC’s have nots–the members lacking financial resources to withstand low crude prices for an extended period and that have objected to Saudi policies (Iran, Iraq, Angola, Nigeria, Libya, Algeria, Ecuador, and Venezuela)—against the haves (Saudi Arabia, Kuwait, the UAE, and Qatar). He has continually supported Venezuelan President Maduro’s calls for an emergency OPEC meeting on prices and his efforts to persuade Saudi Arabia to reverse its policy. Most recently, in the beginning of September, Putin told Maduro that the two countries “must team up to shore up oil prices”.

The Russian-Shiite alliance has obtained geo-economic dimension. Following the support of Russia's actions in Syria, Iran and Iraq are ready to strike at the economy of one of the main sponsors of Syrian President Assad’s coalition - Saudi Arabia. Together with Russia and Venezuela, these countries are negotiatinge with China - the largest consumer of oil in the world - on the country’s purchase of "black gold." If the deal is successful, the Saudis and their allies will lose a key customer. Moreover, like Moscow, Tehran, Baghdad and Caracas respected the OPEC arrangement for its members to lowerare oil production quotas. But another group, consisting of Saudi Arabia, UAE, Kuwait, Qatar and Bahrain violate all possible limits on oil production.

Market analyses shows that the oil they produce in excess of the quotas they agreed to with OPEC totals a whopping 1-1.5 million barrels of oil per day. Such situations are not entirely satisfactory to countries in which the cost of extracting oil higher than in the countries of the Gulf, especially when these economies are more dependent on oil revenues than the economies of the Gulf.

The Saudi Arabian Riyal is tightly pegged to the dollar; because of the cheaper oil, this leavese more gaps in the economy. Saudi Arabia has covered the cost of the increase in extraction volumes. The ruble, however, fluctuates. For example:

Five years ago, oil cost a hundred dollars a barrel. One dollar was worth 30 rubles Russia’s national currency) Therefore, a barrel of oil cost 3,000 rubles. The situation today: oil costs $ 51 per barrel, and a dollar buys 62 rubles. As a result, we get the same 3,000, even more.

So Russia, unlike Saudi Arabia, can afford to provide a so- called ‘discount’ to China, thereby generating interest.

Russia's initiative, which is currently being discussed, could be seen as an attempt to influence the evolving price situation and possibly alter it in Russia’s favor, while combining the efforts of several major players. Together, Russia, Iran, Iraq and Venezuela account for a quarter of the oil produced in the world. In addition, the alliance may attract Ecuador, Nigeria and Angola, which are disgruntled with the current oil prices. By joining forces, these countries will be able to compete with the Saudis and their neighbors. If the deal with China is established, the geo-economic enemiesy of Russia, Iran and China – the Saudis and their Persian Gulf allies, - will be forced to reconsider their views on the extraction of "black gold" and to temper their appetites. Then oil prices will creep up.