The world economy is still driven by oil. It supplies one-third of the world’s energy and fuels more than 90% of transportation. Cheap energy drives economic growth, and rising oil prices act like a back tax for everyone.
Wars and elections are still contested over oil fields and gas pipelines, and as a result, the emergence of new oil axes is strategically important, affecting geopolitics, the global financial system and the environment.
China is the world’s largest oil importer and is on the road to becoming the world’s largest economy. Despite building more coal-fired power plants in 2020 than the rest of the world combined, China’s oil consumption continues to grow.
Russia and Saudi Arabia, on the other hand, are the world’s largest oil exporters and China’s largest supplier, both planning to increase oil exports. The energy axis that emerged between Beijing, Moscow and Riyadh is based on solid economic interests. And he started to develop the political element.
In 2014, the West imposed penal economic sanctions on Russia for annexing Crimea. One of the most predictable results is the dramatic increase in economic cooperation between China and Russia, especially in energy exports. Each year, 1 billion cubic feet of Russian gas is sent to China.
At this year’s Winter Olympics, President Vladimir Putin and President Xi Jinping announced that Russia’s gas exports to China will soon increase by 25% and oil exports will increase by 12.5%.
Putin and West also declared that “there is no limit to the friendship between Russia and China,” showing a new level of political cooperation. In a major breakthrough with previous Chinese policy, West said it opposed the further expansion of NATO when Putin confronted the United States over Ukraine. Both economic and political issues are likely to drive Russia and China closer together.
During the Cold War, Saudi Arabia, the caretaker of Mecca and Medina, confronted Western nations and refused diplomatic relations with atheists in Moscow and Beijing. The times have changed.
Currently, China, not the United States, is Saudi Arabia’s largest trading partner and Aramco’s largest customer. Last year, Saudi Arabia’s oil exports to China exceeded Russia’s. The United States still provides most of Saudi Arabia’s military equipment, but it is China. It has provided ballistic missiles and the technology to manufacture them locally.
One of King Salman’s most important achievements was the creation of a new level of cooperation with Moscow, especially in the oil market. Since November 2016, Saudi Arabia and Russia have led an alliance of oil producers known as OPEC Plus. Saudi Arabia and Russia have often worked together to influence oil prices. Then, in August last year, Riyadh signed a major military cooperation agreement with Moscow and is now supporting the development of Saudi Arabia’s drone capacity.
The role of the dollar as the world’s reserve currency ensures that Washington has a chronic budget deficit and is easily borrowed. For decades, efforts to price oil exports in dollars in Saudi Arabia and its Persian Gulf countries have underpinned the privilege of the dollar. If the world’s largest oil exporters and consumers decide to trade in other ways, they could undermine America’s dominance in the world’s financial markets.
Russia and China have not kept their desire to replace the dollar secret, and they have already priced more than half of their energy transactions in other currencies. Could Saudi Arabia join them?
For decades, the United States has been, and still is, the most important foreign military force in the Middle East. However, Russia now has a military presence in Libya and Syria. China has built a naval base at the mouth of the Red Sea and is Pakistan’s main port.
Saudi Arabia feels threatened by Iran’s involvement in Yemen, Syria and Iraq. With the rapid collapse of the Afghan government, Saudi Arabia and other Gulf countries are questioning the credibility of US security. Russia and China are becoming more and more uncertain economically and politically in the United States, but the Gulf countries are working hard not to take part in the next Cold War.
Oil demand has returned to pre-COVID-19 levels and could increase over the last decade, according to the International Energy Agency. Still, tax increases, regulations, pipeline cancellations, and social pressure all reduce investment and thus oil supply. America is no longer dependent on energy. The transition from hydrocarbons takes time, and it is not clear whether rising oil prices will accelerate or delay that change.
When President Joe Biden and National Security Council Director Brett McGurk recently broke an agreement with Russia and asked Saudi Arabia to pump more oil, they were politely rejected. If you want to lower gasoline prices and maintain the role of the dollar, end the war with hydrocarbons and improve relations with Saudi Arabia.
At the moment, neither is done.
Ambassador Michael Gufoller is a former political adviser to the US Central Army and a former Deputy Chief of Mission to the US Embassy in Riyadh, Saudi Arabia.
David H. Rundell is the author of “Vision or Mirage, Saudi Arabia at the Crossroads” and the former head of the US Embassy in Riyadh, both partners of Arabia Analytics.
They wrote this column for the Dallas Morning News.
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