The impact of Russia’s invasion of Ukraine on the interests of oil producers of the Persian Gulf is much more complex and far-reaching than is commonly thought. It is not limited to a set of gains and opportunities provided to Arab monarchies of the Gulf by the conflict. More important are the lessons for the future of the oil and gas sectors of GCC countries posed by the emerging challenges caused by Russia’s confrontation with the West.
It is largely believed by the Persian Gulf watchers that the invasion of Ukraine generally benefited GCC countries, primarily due to high oil prices boosted by the fallout from the war.[i] Moreover, the coordinated actions of OPEC+ members (which includes Russia) to reduce oil production in the fall of 2022 and in the spring of 2023—which also helped maintain the higher prices—convinced many observers that some Arab Gulf monarchies are even ready to play in the interests of Moscow in the oil market, silently forming a new alliance with Russia. The restrained political reaction of Saudi Arabia and the UAE to the Russian invasion as well as the apparent deepening of Moscow’s multifaceted cooperation with these countries only intensified suspicions. Notwithstanding, the strategic background to these developments is more complex.
Nothing Personal, Just Business
Severing ties with Moscow may bring about more problems for GCC countries than the alternative of preserving their working relationship.
First of all, it would be wrong to accuse Arab monarchies of the Gulf of forming some kind of an “unholy alliance” or taking a pro-Russian position. The naked pragmatism determined by their special perception of the war in Ukraine is what really determines their behaviour. The Gulf’s perception of the war is different from that of the West. Despite some historical parallels that can be drawn between the Russian invasion of Ukraine and Qatar and Kuwait’s own past experiences, this conflict is not considered by the majority of the GCC as “their war”. It is rather viewed as a conflict that is taking place far away from the borders of the Gulf region and in lands that are neither historically nor culturally connected to Arab monarchies. Moreover, the fact that Western partners of the Gulf pay much more attention to the situation in Ukraine than to the Middle East at large further distances Arab leaders from the matter. A pragmatic approach informs policies in Saudi Arabia, the UAE and Kuwait—the latter having had the most critical position towards Russia—to continue cooperation with the Kremlin within the framework of OPEC+. They are clearly interested in maximizing their profits from hydrocarbon exports and maintaining their influence on the oil market, which is expected to remain volatile for years to come. Without Russia, which, contrary to all expectations, is still able to maintain the status of a market leader, OPEC+ would not be as influential. In other words, severing ties with Moscow may bring about more problems for GCC countries than the alternative of preserving their working relationship.
It is also worth considering that there is an active revision of foreign policy priorities in the Gulf primarily related to the changing role of the United States in the region. The limited reaction of the US to the 2019 attacks on the Abqaiq and Khurais oil facilities allegedly conducted by the Iran-backed Houthis showed to GCC member states that the U.S. is no longer interested in guaranteeing their security to the extent it was before.[ii] Meanwhile, the subsequent threats by American politicians to adopt the so-called NOPEC (No Oil Producing and Exporting Cartels Act) legislation against OPEC as a punishment for raising oil prices alongside several other steps—including the release of oil from the strategic petroleum reserve to lower prices in 2022—clearly demonstrated that even a once committed ally can play against the interests of Arab monarchies of the Gulf if deemed necessary.[iii] In this situation, GCC countries are making a serious effort for the diversification of their foreign policy relations.
Gains…
Russia's efforts to redirect its own oil flows to Asia... [has] created a number of economic opportunities for Gulf countries.
The Russian aggression against Ukraine slowed down the process of the energy transition, extending the age of hydrocarbons and demonstrating the need for greater international investment in the upstream sector. Profits from increased oil prices allowed GCC members to mitigate the financial losses of previous years on the one hand—the protracted oil market instability in the second half of the 2010s caused by the impact of the US shale revolution[1] as well as the 2020-2021 COVID pandemic[2] substantially slowed down the Gulf states’ economic growth and emptied their financial reserves. On the other hand, profits were reinvested to improve their macroeconomic indicators, directly resulting in the strengthening of their domestic economies. This allowed GCC countries to build ambitious plans for their own development and attract renewed investment.
The Russia-Ukraine war also moved the focus of the international community from the security of oil and gas demand towards the security of supply by prompting Western countries to prioritize GCC hydrocarbon producers as a potential replacement for Russia in the European energy market and beyond. This, in turn, created additional levers of influence for the GCC when building a dialogue with their Western partners. Despite the objective factors that prevented GCC countries from acting as a full-fledged and immediate replacement for Russia in the EU’s oil and gas market, their presence in Europe notably grew and was not limited exclusively to hydrocarbon supplies. Gulf countries were also able to increase their presence in the petrochemical industry of Europe.
Russia’s efforts to redirect its own oil flows to Asia and away from Europe have themselves created a number of economic opportunities for Gulf countries. On the one hand, the UAE has become one of the most important centres of trade in Russian oil. On the other hand, Saudi Arabia’s purchase of Russian fuel oil for its electricity production made it possible to save its own reserves for export. As Moscow had to provide discounts on its oil and oil products previously exported to Europe to find new markets, this presented a cheaper option for the Saudi economy.
…and Losses
Each GCC economy has different levels of tolerance towards the negative outfall of the war.
At the same time, the existing gains of GCC countries are, to an extent, counterbalanced by the market challenges created by the conflict. Firstly, Moscow is more and more successful in redirecting its export flows to Asia, the traditional consumer market of GCC exports. This, in turn, increases the intensity of competition. In 2022, cheap, albeit toxic, Urals oil was traded at a historically high discount rate, and attracted the attention of Indian and Chinese consumers, forcing some Gulf producers out of these lucrative markets. Secondly, the determination of Gulf producers to maintain high oil prices in spite of growing dissatisfaction among oil consumers and, first of all, the US can create new challenges for GCC producers.[iv] The American failures to persuade the Arab monarchies of the Gulf to limit their price ambitions make the US not only search for alternative (and not always producer-friendly) ways to bring barrel prices down but also try to encourage other consumers to act against the interests of GCC hydrocarbon producers.[v] Thirdly, the impact of the Ukraine crisis on the domestic energy and economic security of certain Gulf states is not as positive as in the case of their oil and gas exports. Each GCC economy has different levels of tolerance towards the negative outfall of the war, including rising fuel prices, high inflation rates and a growing cost of inputs. Yet, even the least vulnerable economies such as those of Saudi Arabia or the UAE started to feel the negative pressure of rising fuel prices and increasing energy costs. High oil incomes also slow down the growth of non-oil sectors by rendering them less of a priority in the framework of diversification programs.
Moreover, the negative impact of the oil market instability on the global economy together with some other factors might even create additional incentives to speed up the energy transition in the long run, thus, leaving the Gulf with even more limited time to adjust to the new realities.[vi] Meanwhile, in order to successfully integrate into the new “post-oil” economic system while ensuring the extended demand for hydrocarbon resources, traditional oil producers of the Gulf need to start implementing ambitious and complex economic programs, including measures aimed at the decarbonization of oil, gas, and petrochemical production, the diversification of their economies, the development of sustainable energy sources, and reconstruction of their own energy systems. All of these require substantial funds generated by oil incomes. Yet, as it will be shown later, the current situation cannot guarantee their steady flow.
Turbulent Times in the Energy Market
Currently, the energy market is experiencing an unprecedented and intense struggle between political and systemic economic factors, whose interaction combinedly determines oil prices. The eventual outcome of this ongoing struggle is still not yet clear. Political factors presented by the war in Ukraine, instability in Libya (whose 1.2 mln barrel production capacity were the hostage of protracted political turmoil and amounting maintenance issues led to occasional and sometimes abrupt cut in the country’s oil production and exports),[vii] the uncertainty of the future of Iran’s nuclear program, unclear prospects for Iran-Saudi relations and broader instability in the Middle East, are pushing prices up. Meanwhile, fundamental economic factors in the market are pulling them down. Among these economic factors are the unpredictability of demand in China, the global restructuring of oil flows due to the EU’s decision to limit dependence on Russia’s hydrocarbons, and the expected slowdown in global economic growth caused by high oil and gas prices, as well as the initial disruptions in supply chains of oil and oil products from Russia to Europe. In comparatively more peaceful times in international relations, the influence of market fundamentals on hydrocarbon trade is always stronger than political factors. This influence, as a rule of thumb, is of a long-term nature.[viii]
The set of solutions for the problems created by geopolitical factors affecting the supply side is relatively easy to apply. Given the availability of alternatives, the market can restructure the chains of supply to replace “problematic” sources. Once this is done, the political factor loses its sharp destabilizing influence on the market that drives price volatility. This, for instance, was the case in 2019, when U.S. sanctions were placed on Venezuela. Venezuela’s heavy and sour oil that could not reach the global market due to sanctions was swiftly replaced by its Russian equivalents.[ix] The economic factors, on the contrary, are mostly connected to the demand side. They can be caused by deep and complex structural changes in the global economy. Their impact on the oil market is not always direct and solutions—as in the case of the current energy transition process—are not always obvious. All of these reasons make the impact of the economic fundamentals on the market situation deeper and long-lasting.[x] However, the world is currently going through abnormal times. Political factors no longer have short-term impact on the market that can be easily compensated by the redirection of oil flows: the Kremlin’s aggression in Ukraine and the accompanying games with “oil weapons” between Russia and the West will affect oil prices for a long time, bringing acute unpredictability to the hydrocarbon market.[xi] Russia’s size and importance as an oil and gas producer play one of the key roles in this: for the first time in recent history, the sanction war is waged against one of the largest hydrocarbon and petrochemical producers whose absence from the market cannot be easily compensated for by other actors.
Learning Lessons
They are betting on a long-term strategy aimed at ensuring the competitiveness and profitability of hydrocarbons in the global market.
GCC countries are forced to adapt to new conditions, implementing adjustment strategies for the development of their oil sectors. Given the current instability of the market and future challenges to the energy transition, they are betting on a long-term strategy aimed at ensuring the competitiveness and profitability of hydrocarbons in the global market. The key elements of this strategy include constant work to maintain low production costs and interaction with key partners in Asia by “binding” them to GCC oil. This is achieved through long-term contracts and their demand for oil from the GCC through investments in the Asian petrochemical sector. Further elements of GCC states’ long-term strategy include active “greening” of the oil production process and investments in the development of alternative energy sources—both to decrease the CO2 footprint of hydrocarbon production by switching domestic oil and gas sector to the use of green energy sources and to diversify their energy exports in the future. In addition to these, investments in the oil production and refining sectors of other countries (including competitors), as well as the preservation of OPEC as an effective lever of influence in the oil market serve the overall strategy of GCC states.
Another important lesson that GCC countries have learned from the current situation is directly related to the behavior of Western consumers. Analyzing the current situation, GCC states increasingly believe that not only Russia is to blame for the destabilization of the oil market, but also its Western adversaries. Before the invasion of Ukraine, a full-fledged sanction war against any of the largest oil producers seemed to be impossible. These producers are incorporated into the global economy too deeply, and the expected consequences of their potential absence from the market were considered too grave. The 2022 US and EU sanctions against Russia showed that no one is untouchable among oil producers and, if properly designed, sanctions can be both very effective and painful for the targeted oil-producing nation. Saudi Arabia and other GCC member states feel that the same sanctions mechanisms that were used against Russia can be used against them. Following the 2022 sanctions against Russia, US threats to implement the NOPEC legislation carried far more weight. Moreover, decisions to open up the US Strategic Petroleum Reserve to decrease oil prices clearly demonstrated US willingness for action. Consequently, the EU initiative to impose a price restriction on Russian oil was immediately projected by the Saudi leadership on their own country, which forced Riyadh to demonstrate solidarity with Moscow by threatening to stop selling oil to buyers who dare to impose price restrictions on Saudi oil (a threat similar to the one that the Kremlin extended to its own customers).
Conclusion
All main gains acquired by GCC hydrocarbon producers from the conflict seem to be [...] short-lived.
Despite existing beliefs, Arab Gulf countries will not merely benefit from the war in Ukraine, and the ensuing tensions between Russia and the West. On the contrary, the transformation of hydrocarbon markets under the influence of this conflict raises important challenges for oil and gas producers in the Gulf.
Indeed, the war in Ukraine presented the Gulf with the lucrative opportunity to enrich their economies. High oil prices in 2022 not only replenished hydrocarbon producers’ coffers after the COVID pandemic but also affected their macroeconomic performance positively. Yet, overall market instability makes high oil incomes unpredictable: since peaking in June-July 2022, oil prices have been gradually falling. Initial Western interest in the Gulf as an alternative to Russian sources of oil supplies did strengthen Arab Gulf states’ position in the international economic and political arenas. Nevertheless, the subsequent understanding by the US and the EU that none of the Gulf players are able or willing to immediately replace Russia increased suspicions that Gulf-based members of OPEC+ are actually cooperating with Russia to keep oil prices high.
Under these circumstances, all main gains acquired by GCC hydrocarbon producers from the conflict seem to be either short-lived or counterbalanced by other factors. Far more important are those changes that the Arab monarchies of the Gulf are making to readjust to the new realities of the market. First of all, the current situation will definitely result in more frequent interaction between the Gulf and Asian oil consumers. Secondly, Russia-GCC cooperation within the framework of OPEC+ will continue as long as Russia manages to maintain its influence in the oil market. Third, the potential speeding up of the energy transition (after a momentary pause) is inevitably pushing the Gulf towards the diversification of their economies, the development of sustainable energy resources and, simultaneously, a more active struggle to retain their position as the last profitable hydrocarbon producers of the world. While their overall relations with Western oil consumers will be cautious and spoiled by mistrust to an extent, GCC states will keep exploiting opportunities presented by today’s energy market.
[1] “U.S. shale revolution” is a term that refers to new ways of tight oil and gas extraction massively introduced in the U.S. in the 2000s. They allowed the American hydrocarbon producers to significantly increase their domestic output within a relatively brief time. This not only changed the situation at the global oil market by turning the U.S. in one of the largest hydrocarbon producers but created the shale oil industry whose life cycles and principles of functioning substantially differed from that of the conventional oil sector and often created challenges for traditional producers such as Saudi Arabia or Russia causing market oversupplies. See Daniel Yergin, The New Map. Energy, Climate and the Clash of Nations. (New-York: Penguin Press, 2020).
[2] COVID pandemic has complex negative impact on the Gulf economies. On the one hand, the Gulf states were to allocate substantial reserves to support their domestic producers harmed by the national lockdowns and implement necessary measures preventing the spread of the virus. On the other hand, the global decrease in fuel demand and slow down in the world economic activities negatively affected their abilities to generate incomes from hydrocarbon trade.
[i] Gulf Times, “Russia-Ukraine conflict benefits GCC hydrocarbon companies: Moody’s”, Gulf Times, 8 June 2022 https://www.gulf-times.com/story/718820/russia-ukraine-conflict-benefits-gcc-hydrocarbon-companies-moodys; Li-Chen Sim, “The Gulf states: Beneficiaries of the Russia-Europe energy war?”, Middle East Institute, 12 January 2023, https://www.mei.edu/publications/gulf-states-beneficiaries-russia-europe-energy-war
[ii] Jason Bordoff, Karen Young, “OPEC+ Oil Production Cut Shows Saudi Geopolitical Ambitions”, Foreign Policy, April 6, 2023 https://foreignpolicy.com/2023/04/06/saudi-opec-oil-production-cut-price-geopolitics-biden-china/?utm_source=Center+on+Global+Energy+Policy+Mailing+List&utm_campaign=9b92b619a0-EMAIL_CAMPAIGN_2019_09_18_12_40_COPY_01&utm_medium=email&utm_term=0_0773077aac-9b92b619a0-102244821.
[iii] Salma El Wardany, “OPEC+ Panel Recommends 2 Million-Barrel Cut to Output Limits”, Bloomberg, October 5, 2022 https://www.bloomberg.com/news/articles/2022-10-05/opec-panel-recommends-2-million-barrel-cut-to-output-limits.
[iv] Ben Cahil, “OPEC+ Deepens Producer-Consumer Rift”, CSIS, 6 October 2022, https://www.csis.org/analysis/opec-deepens-producer-consumer-rift; Grant Smith, Salma El Wardany, “OPEC+ refuses to heed consumers’ call for more oil”, Al Jazeera, 31 March 2022 https://www.aljazeera.com/economy/2022/3/31/opec-refuses-to-heed-consumers-call-for-more-oil
[v] Trevor Hunnicutt, Jarrett Renshaw, ‘U.S. Asks Japan, China, Others to Consider Tapping Oil Reserves’, Reuters, 18 November 2021, https://www.reuters.com/business/energy/exclusive-us-asks-big-countries-coordinate-releases-oil-reserves-sources-2021-11-17/
[vi] Kazunari Kanawa, “Renewable energy transition speeds up during Ukraine war, led by China”, Nikkei Asia, 14 March 2023, https://asia.nikkei.com/Business/Energy/Renewable-energy-transition-speeds-up-during-Ukraine-war-led-by-China; Maria Mendiluce, “No more excuses to delay the shift to clean energy”, EURACTIV.com, 7 November 2022, https://www.euractiv.com/section/energy/opinion/no-more-excuses-to-delay-the-shift-to-clean-energy/
[vii] Aydin Calik, “Is Libya’s oil sector turning a corner?”, Argus Media, 27 March 2023, https://www.argusmedia.com/en/news/2433258-is-libyas-oil-sector-turning-a-corner
[viii] See Bassam Fattouh, Andreas Economou, Saudi Arabia’s Next Oil Move. (Oxford: Oxford Institute for Energy Studies, 2019); Roland Dannreuther, Energy Security. (Caambridge: Polity, 2017). Pp. 9 – 32
[ix] Eklavya Gupta, “Analysis: US reliance on Russian oil hits record high despite souring ties”, S&P Global Commodity Insights, April 16, 2021, https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/041621-us-reliance-on-russian-oil-hits-record-high-despite-souring-ties
[x] See Fattouh, Economou, Saudi Arabia’s Next Oil Move; Dannreuther, Energy Security. Pp. 9 – 32;
[xi] See Bassam Fattouh, Andreas Economou, Oil Relations and the Balance of Power between the Big-3 Oil Producers: Transformations and Impacts. (Oxford: Oxford Institute for Energy Studies, 2023)
