The development of bilateral relations between the Soviet Union and Saudi Arabia in an effort to stabilize oil prices for the long run. The infrastructure and strategies required achieving stable oil prices and the likely demise of OPEC in the wake of this new collaboration.
Diplomatic relations between the two countries had virtually been non-existent after World War II as the Saudis aligned themselves with the United States. However, rising policy differences between the two allies, the American foreign policy towards Palestine and arms sales weakened the alliance. But the fuse to the charge had been the collapse of oil prices in 1985 and 1986. With economic liberalization in Eastern Europe and the Soviet Union, relations between the Odd Couple began to emerge. Marked by political and cultural exchanges between the two nations.
Due to reduced expenditure on maintenance of oil wells, both countries experienced a decline in oil production. Saudi Arabia has the largest oil reserves in the world and the largest exporter. On the other hand The Soviet Union is the largest producer and second largest exporter. For the Saudis to achieve maximum returns on their huge reserves, they would require the price of oil to remain relatively low and stable to sustain demand. To do so they must increase their production, for which they have begun a reinvestment program to raise production levels back to that of the early 80s.
Their desires would not be fulfilled should there be a lack of co-operation from the second largest exporter in the world: the Soviet Union. In contrast to the Saudis, the Soviet Union would prefer to have higher prices of oil in order to maximize income from their lower level of reserves. As long as it does not impede their export levels. But market economic mechanisms will adjust the production and export to levels that would sustain prices in the long run. Should there be no co-operation when the Saudis increase their production, it is likely that another price collapse similar to that of 1985 would take place. The Soviet Union will have to support the Saudis plan for lower stable prices with gradual increase in real prices over the long haul. The largest players in this scenario would be Saudi Arabia, Soviet Union, Iraq and smaller yet influential producers like Kuwait, Iran and Abu Dhabi to control production and prices and the Soviet Energy policy would in part shape Saudi Arabia’s economic future.
The Soviet Union does not belong to the powerful Organization of Petroleum Exporting Countries. Being the largest exporter, thus having a sizeable influence on prices over the long run. Once the alliance is forged between the two powerhouses and along with the minor houses the future of oil prices would be determined. This would be a catalyst for the fall of OPEC since production levels and the new collaboration and not OPEC would control prices.
Summary by Shaun Liu