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Abstract
We analyze the likelihood of different coalitions emerging in energy markets. Our
analysis considers both economic and political payoffs resulting from alternative energy
policies. We discuss the likelihood of price-wars in energy markets and identify two
conditions under which price-wars can occur. There can be a price-war in the gas
market if Russia is determined to protect its market-share in Europe by knocking out
other higher cost producers. We find that competitive pressures created by shale
gas could make this option more appealing to Russia. Second, Saudi Arabia can
generate an oil price-war as a foreign policy tool in order to weaken Iran's position
as a rival to the Kingdom. Finally, we consider the recent democratization movement
in the Middle East. Significant changes in geopolitical payoffs may bring about new
coalitions involving Russia. Nevertheless, we find that a gas cartel is unlikely to form
in the perceivable future
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New Alignments? The Geopolitics of Gas and Oil
Cartels and the Changing Middle East
by
Songying Fang, Amy Myers Ja e, and Ted Temzelides
We wish to thank David Mares, Edward Morse, and Kristopher W. Ramsay for their valuable comments
and suggestions. We also thank Keily Miller and James Coan for their excellent assistance of the research.
All errors are the sole responsibility of the authors.
Songying Fang is Assistant Professor of Political Science at Rice University. Amy Myers Ja e is the
Wallace S. Wilson Fellow for Energy Studies at the James A. Baker III Institute for Public Policy at Rice
University and is serving as co-director of a new study on the Geopolitics of Natural Gas with Harvard
University's Kennedy School of Government. Ted Temzelides is Professor of Economics and a Rice Scholar
at the James A. Baker III Institute for Public Policy at Rice University.
1Throughout the modern period, resource producers have sought to form coalitions in order
to enhance their economic power. One of the most successful coalitions is the Organization
of Petroleum Exporting Countries (OPEC), which rose to global in
uence in the 1970s amid
international shortages of oil. In the last ve years, one of the most striking developments
in the global energy landscape has been the dramatic rise in the prospects for natural gas
as a global fuel. Enthusiasm for this fuel source is gaining momentum, and the likelihood
that natural gas will play a major strategic role in the world economy is growing. The new
gusto for natural gas is partly a product of its many attractive attributes (particularly its
relatively low-carbon emissions when compared with other fossil fuels), and partly a result
of its growing availability, as rising supplies from shale become available in North America.
Russia, one of the world's largest natural gas reserve holders, was quick to respond to this
growth in global natural gas demand by building new pipelines, as well as lobbying for a
gas cartel to counterbalance the competitive market in
uence resulting from rising shale
gas supplies. Simultaneously, as it focused on the geopolitical leverage it could achieve as
a petro-exporter, Russia expressed interest in joining OPEC formally.
1
If Russia was able
to form either a gas or oil coalition with other important exporters from the Middle East,
it would signi cantly change the way that the energy markets operate and, consequently,
in
uence the geopolitics of energy and international relations more generally.
In this study, we investigate two related questions raised by the above observations.
First, what is the likelihood that Russia will be successful in creating new coalitions in en-
ergy markets in the near future? Russia's aggressive use of its own energy exports as a tool of
statecraft and diplomatic lever in recent years has reintroduced fears of an nergy weapon'
that could be wielded in international discourse. It has been argued that tightening energy
markets could raise the bene ts and possible chances of success for an energy exporting
country, alone or in combination with others, to try to wrest political concessions by threat-
ening to cut o energy supplies. Such an event would present a challenge for the international
Note 1
See Jareer Elass and Amy Myers Ja e,\The History and Politics of Russia's Relations with OPEC,'
working paper, Baker Institute.
2economy and it could even lead to military con
ict.
Note 2
Second, even if new coalitions involving
Russia are not imminent, in light of the recent political developments in the Middle East,
how would the likelihood of the coalitions change as a result of the evolving relationship
between the United States and the major resource producers in the region? Finally, in the
event that proli c shale gas resources prevent energy markets from tightening further and
indeed reverse the trend, will low-cost major oil and gas exporters such as Russia, Qatar or
Saudi Arabia, engage in price war tactics? Oil and gas production from shale is vulnerable
to competitive pressures due to its high costs of recovery technique.
Historically, the United States' close security relations with two major energy suppliers
in the Mideast, Saudi Arabia (the world's largest oil exporter) and Qatar (the world's largest
lique ed natural gas exporter) have limited Russia's ability to achieve resource rent-seeking
alliances in the Middle East. In recent years, however, Russia has tried to tap its large energy
resource endowments to reassert its place as a global superpower.
Note 3 However, such e orts have
not been well-received by important members of OPEC and the public discussion of Russia
joining OPEC has made little progress.
Note 4
Similarly, Russia's initial e orts to create a gas
cartel have been unsuccessful. In 2009, Russian gas industry leader Alexander Medvedev
2
See Resources War literature, Michael Klare, Elhefnawy (materials { The concept, rst introduced by
Michael Klare, theorizes that diminishing supplies of vital materials will raise the risk of con
ict across
the globe and \introduce new stresses into the international system.' See Michael Klare, Resource Wars,
(New York: Henry Holt and Company, 2001). Klare notes in his book: \No highly industrialized society
can survive at present without substantial supplies of oil, and so any signi cant threat to the continued
availability of this resource will prove a cause of crisis, and, in extreme cases, provoke the use of military
force.' Nader Elhefnawy takes the argument a step further, asserting that since the U.S. economy is the
most oil dependent among world powers, he United States could ultimately lose its position as a world
power...just as the UKs position declined along with the age of coal and steam that it (the UK) pioneered.'
See Nader Elhefnawy ,\The Impending Oil Shock,' Survival, (June, 2008)
3
For a detailed description of Russia's energy diplomacy since the breakup of the Soviet Union, see
Edward L. Morse and James Richard, \The Battle for Energy Dominance,' Foreign A airs, (March/April
2002). Also, Amy Myers Ja e and Robert Manning, \Russia, Energy and the West', Survival, Vol. 43, No.
2 (Summer 2001), and Amy Myers Ja e and Ronald Soligo, \Energy Security: the Russian Connection,'
in Energy Security and Global Politics: The Militarization of Resource Management, Eds. Daniel Moran
and James A. Russell (Abington: Routledge, 2008). Russian Energy Minister Sergei Shmatko has said that
Russia had \such a signi cant position in the high society of world oil, a Russian factor should appear.'
4
Stanley Reed, \Russia Weighs In At OPEC Meeting,' Business Week (September 9, 2008). Also, see
Jareer Elass and Amy Myers Ja e, \The History and Politics of Russias Relations with OPEC,' Working
Paper, The James A. Baker III Institute for Public Policy.
3suggested that a gas troika of Iran, Qatar, and Russia consider joint \projects that could
be implemented by the three countries in gas production and transportation.'
5 Addressing
a December 23, 2008, gathering of the Gas Exporting Countries Forum (GECF), a loose
grouping of natural gas producers, Prime Minister Putin hinted that a gas-producer group
might be rent-seeking. Because the cost of extracting gas was rising sharply, Putin contended
that he era of cheap energy resources, of cheap gas, is of course coming to an end.'
6
Still,
while Russia has, at the highest levels, approached the leadership of its biggest lique ed
natural gas (LNG) or pipeline gas competitors in Iran, Libya, Algeria, and Qatar, so far, it
has failed to create convincing partnerships that could serve as the basis for cartelization.
Despite the apparent failure for new coalitions to emerge in the energy markets, there has
been continuing speculation about the prospect of a gas cartel in the imminent future. Some
analysts have weighed in on the question and their answers tend to be negative. The reasons
proposed range from a collective action problem that prevents members of the GECF to
reach an agreement,
7
fragmented gas market structure,
8
and an imbalance of surplus supply
potential versus demand that is likely to prevent a cartel of producers from gaining sucient
monopoly power in the market.
9 What is noticeably missing in the existing literature is an
analysis of whether geopolitical interests of key players are lined up in such a way that make
new coalitions desirable. In other words, the existing studies have not taken into account how
the foreign policy interests of the major gas and oil producers interact with their economic
interests of making higher pro ts. In addition, the possibility of a new gas cartel has been
discussed solely from the perspective of the gas market. However, oil and natural gas serve
5Andrei Glazov, \Gazprom Extends Global Reach,' Nefte Compass (November 20, 2008); \Gazprom Still
Pushing Troika, China Sales,' World Gas Intelligence (November 19, 2008).
6
\Putin says `cheap gas era' ending,' BBC News (December 23, 2008).
7
See Daniel Canty, \Analysis: Could collective gas pricing be upon us?' arabian OilandGas.com (May
20th, 2010), and Adal Mirza, \Time for a Gas OPEC?' MEED (No.17, April 2010).
8Dominique Finon, \Russia and the `Gas-OPEC'. Real or Perceived Threat?'IFRI Russia/NIS Center
(November 2007)
9Obindah N. Wagbara. \How Would the Gas Exporting Countries Forum In
uence Gas Trade?'Energy
Policy (Vol. 35 2007). Also see Kenneth B. Medlock III, Amy Ja e, and Peter R. Hartley, \Shale Gas and
US National Security,' Working Paper, US Department of Energy/James A. Baker III Institute for Public
Policy.
4as substitutes in many economic sectors, and moreover, Russia is a major producer in both
markets. Thus, its strategies on oil and gas are likely to be interconnected. Falling natural
gas prices relative to oil make the interconnectedness more compelling for consideration by
major producers. We address these issues in this study.
Using a game-theoretic approach, we focus on the choices faced by three major resource
producers in the world: Russia, Saudi Arabia and Qatar. The activities of these producers
generate much of the dynamics in energy markets.
10
Russia is a key player in both oil and gas
markets, while Saudi Arabia is primarily an oil producer, and the price-setter for international
oil prices. Qatar, primarily a gas producer, is the largest supplier of globally traded LNG
and has recently gained a price-setting role in natural gas markets as LNG trade has rapidly
expanded. While Russia is currently free-riding on a high oil price set by OPEC, Russia
was also clearly hurt by oil price wars waged by Saudi Arabia in the mid 80s. Additionally,
the competition from Qatar in the gas market has signi cantly cut into Russia's economic
interests in the past two years and is actively lessening Moscow's geopolitical in
uence.
Consequently, there has been speculation about how Russia might respond to the threat
that both Saudi Arabia and Qatar could further weaken its global position through future
oil and gas price wars. Will Russia be able to form coalitions with these two key players
in order to avoid price wars? Alternatively, will Russia's stronger, partially privatized oil
industry of today better position it to withstand and even win a potential price war? We
touch on these issues as we address broader questions of the interplay between the two
markets and their likely long-term developments in response to changing regional and global
political environments.
The strategic nature of the relationships makes game theory an appropriate analytic tool
10We do not consider Iran as a player in our model because even though it is the third largest reserve
holder of natural gas, long standing international economic sanctions against the country have prevented
Iran from developing export capacity. At this juncture, given market competition and political risk, it could
take Iran as long as 15 to 20 years before it could become a major player in the global gas scene. See
Medlock, Kenneth, Amy Myers Ja e, and Peter Hartley, \Shale Gas and US National Security,' Working
Paper, Baker Institute.
5for our study. In addition to economic returns, the payo s to the corresponding countries
involve signi cant geopolitical components, which are inherently interdependent. Therefore,
identifying the geopolitical interests of the respective countries and analyzing their impor-
tance relative to their economic interests are central to our analysis.
11 Moreover, as the
markets for oil and natural gas are interconnected, we adopt a cooperative game-theoretic
framework in order to analyze potential coalition formations in the two markets simultane-
ously. As we mentioned earlier, oil and natural gas can serve as substitutes|in some cases
most directly through the use of fuel-switching equipment or in other cases, through the
investment of technologies to permanently change equipment to burn one fuel versus the
other. Over the past two decades, natural gas has made strong gains as a substitute for oil
as a fuel for electricity generation and industrial activity, as a feedstock for the manufac-
turing of petrochemicals, and in residential heating. This substitutability of natural gas for
oil is expected to grow in the coming years, as new conversion technologies allow natural
gas to enter the transportation sector more easily through an increase in the number of
gas-to-liquids processing plants, compressed natural gas car engines, and indirectly through
electric cars.
One of the central ndings of our analysis is that geopolitical considerations can be dom-
inant and may determine a very di erent outcome from that prescribed solely by economic
considerations. Speci cally, our analysis shows that one explanation for Russia's failure to
strike new energy coalitions is the ongoing oil-for-security relationship that Saudi Arabia
and Qatar have maintained with the United States. Importantly, our analysis also shed light
on how the status quo may change in response to new political developments in the Mid-
dle East. We argue that the uprising and democratization in the Middle East may compel
Saudi Arabia to pay more attention to its domestic needs and, thus, elevate the importance
of the economic payo s from its oil resources above the geopolitical payo s from a special
11As Kissinger have noted: \[G]ame theory's major contribution was the payo matrix, in that it made
people realize that their adversaries were looking at the con
ict in a similar way as they were.' On the State
of Art in Game Theory: An Interview with Robert Aumann, Eric Van Damme, Interviewer, Games and
Economic Behavior 24, p. 181-210 (1998).
6Saudi-US relationship. The consequence could be a Saudi-Russia coalition in the oil market.
Saudi Arabia's incentive to form such a coalition will become stronger if Russia can also
help contain Iranian nuclear ambitions. On the other hand, our analysis suggests that the
possibility of a gas cartel between Russia and Qatar is less likely.
The rest of the paper proceeds as follows. In the next section we present our assumptions
about the key players' preferences over their foreign policy goals. We then combine the
assumptions with a simple cooperative game-theoretic model to identify the most plausible
coalitions. In the section following the modeling exercise, we discuss in detail whether these
coalitions are likely to materialize under the current environment. Our analysis suggests that
the answer to this question is negative. We then address a natural question that arises from
the nding that the status quo is stable: the likelihood of price-wars. Finally, we investigate
whether new coalitions are more likely to emerge due to the uprising and democratization of
the Middle East and the potential decline of the U.S. in
uence in the region. We conclude
with a summary of our ndings.
Assumptions
In this section we discuss the preferences of the key participants over the potential outcomes
of their foreign policies. For the purposes of our modeling, we assign Saudi Arabia three main
foreign policy objectives: maintaining a strategic partnership with the United States, which
is fundamental to its security; maximizing the economic and geopolitical bene ts from being
the most important oil producer in the world; and maximizing its global and regional political
in
uence. These three dimensions are certainly not independent of each other; in particular,
Saudi Arabia's global and regional in
uence is partly due to its special relationship with the
United States and its status as the most in
uential player in the oil market. Saudi Arabia is
the only nation that currently has the power to raise or lower the price of oil singlehandedly.
However, Saudi Arabia also derives its in
uence in international and regional a airs from its
position as the spiritual leader of the Arab world due to its important role as the guardian
7of Islams holiest religious sites and from its wealth, which is used to support its branch of
Islamic teaching and practice in other countries. For conceptual clarity, we nd it useful to
treat these three dimensions as distinct.
Moreover, we will postulate that when these three objectives cannot be accommodated
simultaneously, particularly when the rst two objectives clash, national security takes prece-
dence. In other words, Saudi Arabia prefers an outcome that protects its special relationship
with the United States over alternative outcomes that would imply higher economic bene ts
or global and regional in
uence. We believe that this is a reasonable premise. Saudi Arabias
policies in response to Iraqs 1990 invasion of Kuwait are a prime example of this preference.
Second, we postulate that Qatar has three foreign policy objectives: maintaining a strate-
gic partnership with the United States, maximizing the economic bene ts from being the
major gas producer, and promoting its global and regional in
uence (in particular, in a man-
ner that is independent of the regional power of Saudi Arabia). Like Saudi Arabia, Qatar's
regional in
uence is mainly a function of its special relationship with the United States
and its role as the main gas producer. Qatar enjoys additional in
uence through a multi-
directional foreign policy, for example, through the soft power of its government-supported
and controlled satellite television network, Al Jazeera, and through actively engaging in re-
gional diplomacy. As in the case of Saudi Arabia, we postulate that the geopolitical payo s
for Qatar from its relationship with the United States dominate its economic payo s as well
as its payo s from having other tangible in
uence in global and regional a airs.
For the purposes of this exercise, we concentrate on two main foreign policy objectives
for Russia: reasserting its status as a major power in international politics, and deriving
maximal economic bene ts from being a major oil and gas producer.
12
. Moreover, we pos-
tulate that Russia values its major power status more than the economic bene ts from the
oil and gas markets when the two goals are at odds with each other. This postulate has
12Russia also cares deeply about securing its borders and preventing separatism in its far
ung regions as
well as about other international matters, but for the purposes of this study, we consider those objectives
most relevant to the questions at hand
8been demonstrated in numerous ways including by Russias willingness to sell oil or gas at
discounted prices to allied neighboring countries, as well as by its cautiousness to increase
its oil and gas export revenues by allowing its stranded oil and gas in the Russian Far East
to be developed to export by pipeline to China.
13
Model
Here we develop a cooperative game-theoretic model to analyze the questions raised in the
previous section. This approach allows us to identify outcomes that are stable (or, in the
core), versus those that are not. Unstable outcomes can be improved upon by a coalition
of participants; as we assume that all participants are rational, we will conclude that such
outcomes are unlikely to emerge.
14 We will concentrate on outcomes that are immune to
potential improvements by di erent coalitions of producers. We will say that a coalition
C blocks or improves upon an outcome if there is another feasible outcome that makes all
members of the coalition strictly better o .
15
The core is the set of all feasible outcomes
that cannot be improved upon by any coalition.
We model the interaction between three players: Russia (R), Qatar (Q), and Saudi
Arabia (S). Consistent with our earlier discussion, we will assume that Russia is a producer
in both energy markets, while Saudi Arabia is only an oil producer and Qatar only a gas
producer. We note that this approach is an instructive proxy for conditions in the world
energy market where some big players are mostly gas exporters, others only oil exporters,
and still others export both oil and gas. Given Russia, Qatar and Saudi Arabias respective
roles in the two markets, there are six plausible outcomes with respect to the relationships
13
See Russian Energy Policy in East Siberia and the Far East by Nodari Simonia for a discussion about
how Russias fear about territorial matters and permeable borders overshadowed its interest in optimizing oil
and gas sales to China. Available at http://bakerinstitute.org/publications/russian-energy-policy-in-east-
siberia-and-the-far-east .
14One advantage of the cooperative approach is that it allows us to characterize stable outcomes without
having to specify the details of the underlying interactions that are not central to our analysis and can seem
arbitrary, such as the order of play.
15We assume that producers who are not members of the blocking coalition will do the best for themselves
given that C is formed.
9between the three countries in the two markets. We enumerate these outcomes below. Note
that we use RO and RG to refer to Russia's roles as an oil producer and a gas producer,
respectively.
1. fRO; Sg, fRG; Qg: Russia forms a cartel with Saudi Arabia in the oil market and forms
a cartel with Qatar in the gas market.
2. fRO; Sg, fRGg, fQg: Russia forms a coalition with Saudi Arabia in the oil market
while Russia and Qatar operate independently in the gas market.
3. fROg, fSg, fRG; Qg: Russia and Saudi Arabia operate independently in the oil market
while Russia forms a cartel with Qatar in the gas market.
4. fRO; RGg, fSg, fQg: Russia, Saudi Arabia, and Qatar all operate independently in
both markets.
5. fRO; RGg, fS; Qg: Russia operates independently in both markets while Saudi Arabia
and Qatar form a cartel over both oil and gas markets.
6. fRO; RG; S; Qg: Russia, Saudi Arabia, and Qatar form a coalition in both oil and gas
markets.
Imbedding in the model our assumptions about the countries' preferences over foreign
policy outcomes, we argue that some of the above outcomes are not plausible. In other
words, certain coalitions are not in the core, as they can be improved upon by some other
coalitions.
First, we argue that outcomes 1 and 2 cannot be in the core because Saudi Arabia will
be signi cantly better o both geopolitically and economically by leaving the coalition and
acting unilaterally. Geopolitically, an alliance with Russia would presumably dilute Saudi
Arabia's special relationship with the United States and reduce its access to US protection
and military assistance, which will negatively a ect its security vis-a-vis its regional rival,
10Iran. Damage to the US-Saudi relationship might also weaken Riyadhs international and
regional in
uence.
16
From an economic point of view, instead of single-handedly in
uencing
oil prices, Saudi Arabia would have to share that power once it forms a coalition with Russia.
Moreover, by having an oil cartel between Saudi Arabia and Russia, oil consuming countries
would be even more motivated to diversify their energy usage to move away from oil and
would likely seek out Qatar and other natural gas producers as a means of diversi cation.
Taking both economic and geopolitical factors into consideration, it appears more plausible
that Saudi Arabia would rather go at it alone regardless of whether Russia forms a cartel with
Qatar in gas production or not. We conclude that Saudi Arabia can unilaterally improve
upon outcomes 1 and 2.
Second, we argue that outcome 5 cannot be stable. Constrained by Saudi Arabia in such
a coalition, Qatar will be worse o in terms of deriving economic bene ts and exercising
international and regional in
uence. Economically, by emphasizing LNG exports (Qatar is
the largest exporter of LNG in the world), it has made its income stream largely separate
and independent from Saudi Arabia. The shift in Qatar's energy portfolio towards natural
gas has allowed the tiny country to move to a commodity for which Saudi Arabia has
a less dominating in
uence and \ t with Qatar's desire to obtain greater independence
from Saudi Arabia and attain economic and security relationships that were outside direct
Saudi control.'
17 Qatar also brought in American rms to develop its natural gas, hoping to
strengthen its security relationship with the United States.
18
The move to natural gas has
paid o handsomely as Qatar is now the largest exporter of LNG in the world and boasts
the highest per capita gross domestic product in the world.
Qatar is also a major supplier of LNG, which gives it additional international stature.
It would not want Saudi Arabia to be able to dictate its gas policies and thereby dilute the
16
This weakening in military and regional in
uence could be ameliorated if Saudi Arabia could make the
coalition conditional on Russia's cooperation on containing Iran's access to military arms.
17Kohei Hashimoto, Jareer Elass and Stacy L. Eller, \Lique ed Natural Gas from Qatar: The Qatar Gas
Project,' Natural Gas and Geopolitics from 1970 to 2030, (Cambridge: Cambridge University Press, 2006).
18
Ibid.
11power and in
uence it gets from being the major supply alternative to Russia and serving
as a major natural gas supplier to China, Japan, and South Korea. Additionally, because
natural gas is a substitute for oil, Saudi Arabia would prefer to have less competition from
natural gas. Thus, in an alliance with Qatar, Saudi Arabia would likely try to restrain
Qatar's ability to provide a competing fuel.
Finally, by being an independent gas supplier, Qatar becomes more important geopolit-
ically and has been able to strengthen its independent security relationship with the United
States. Since 1996, recognizing the importance of Qatar's natural gas, the U.S. government,
via the Export-Import Bank has provided over $2 billion in loan guarantees to support var-
ious natural gas development projects in Qatar.
19
In 2003, the US Combat Air Operations
Center for the Middle East moved from Saudi Arabia to Qatar's Al-Udeid airbase. The
Qatari base and other facilities now \serve as logistics, command and basing hubs for the
US Central Command (CENTCOM) area of operations, including Iraq and Afghanistan.'
20
Qatar maintains close strategic relations with the United States \as a balance to the in
u-
ence of powerful neighbors in Saudi Arabia and Iran.'
21 An alliance with Saudi Arabia would
give the Saudis more sway in trying to limit Qatar's independent foreign policy. Thus, we
argue that the coalition fQg improves upon outcome 5 regardless of what the other countries
do.
This leaves us with 3, 4 and 6 as viable candidates for stable outcomes. Outcome 4,
where the three countries are operating independently, is in fact the status quo. Thus, our
analysis provides an explanation for the emergence and maintenance of the current status
quo. Other plausible alternatives are a gas cartel between Russia and Qatar (outcome 3),
and a grand coalition of all three countries (outcome 6). In the remainder of the paper, we
analyze under what conditions changes in geopolitical and economic conditions might give
rise to a change in the status quo.
19
Christopher M. Blanchard, \Qatar: Background and US Relations,' US Congressional Research Service
(May 16, 2011).
20
Ibid.
21
Ibid.
12Gas Cartel: An Unlikely Coalition
Given our analysis so far, there are only two scenarios in which a gas cartel can potentially
emerge. The rst is if all three countries come together and form a grand coalition of gas
and oil (outcome 6). Indeed, it can be plausibly argued that, purely in terms of economic
payo s, the three countries involved would experience the greatest payo s when they form
a grand coalition . However, we will argue that this scenario is highly unlikely. This is
a central nding of our analysis, namely that when geopolitical considerations are taken
into consideration, they may determine a very di erent outcome from that prescribed solely
by economic considerations. More precisely, while it is true that|having both oil and gas
reserves|Russia is better o in the cartel scenario both economically and geopolitically, the
same cannot be said about Qatar and Saudi Arabia.
For Qatar, a grand coalition can eliminate the possibility of a price-war with either
Russia or Saudi Arabia. This would increase Qatar's revenue, but the increase would not
be substantial. This is because there is an over-supply of gas in the world due to fringe
supplies from the United States, Canada, Australia, etc. As a result, it is dicult to raise
the gas price signi cantly.
22 On the other hand, being in the grand coalition would weaken
Qatar's relationship with both the United States and the EU, while it would increase the
political in
uence of Saudi Arabia in international a airs, thus, negatively a ecting Qatar's
geopolitical interests. In the end, we believe a strong case can be made that the increase in
economic bene t from joining the grand coalition will not be enough to o set Qatar's loss
in the geopolitical arena.
Perhaps more importantly, Saudi Arabia does not have an incentive to form such a
coalition. Currently, Saudi Arabia already enjoys enormous economic gains from relatively
high oil prices, and the kingdom's limited economy has diculties absorbing a sudden in
ux
of petrodollars that arise from oil prices that are unsustainably high. Experience shows
22Medlock, Kenneth, Amy Myers Ja e, and Peter Hartley, \Shale Gas and US National Security,' Working
Paper, Baker Institute.
13that temporary pro ts from unusually high oil prices are often lost because they must be
immediately reinvested in global nancial markets that are prone to overheat.
23
In addition,
high oil prices can result in a global recession, which would quickly curtail long-term demand
for Saudi oil. This suggests that the additional economic gains from the grand coalition may
not be all that enticing for Saudi Arabia, as they would likely come at the cost of losing some
of the geopolitical leverage that the country currently enjoys. Saudi Arabia derives much of
its power from its important role as the \central bank' of international oil. Since the 1970s,
Saudi Arabia has served as the global swing producer, adding oil to markets when prices rise
too high and threaten the global economy, and cutting its production when low prices prove
destabilizing to important oil producing regions. Saudi Arabia's ability to single-handedly
alter the price of oil gives the kingdom signi cant geopolitical power. Saudi Arabia has used
its ability to lower the price of oil to its geopolitical advantage on many occasions over the
decades. With this oil superpower stature comes the bargaining power that Saudi Arabia
enjoys on the international stage, including its new and prized position in the G-20.
This leaves us with the only other alternative to the status quo, outcome 3. This is often
touted as the most plausible scenario given that Russia is eager to solve the problem of a
potential wo-front economic war' with both Qatar and Saudi Arabia. In this scenario,
Russia forms a gas coalition with Qatar, while it remains in a competitive relationship with
Saudi Arabia in the oil market. One aspect of this scenario is that, having both resources,
Russia will have an incentive to use the cartel to advance its overall interest, while Qatar
will be constrained on the gas market and weakened geopolitically by losing its special
relationship with the United States and Europe. As we mentioned, this relationship derives,
in part, from its important role as an alternative supplier of natural gas in competition with
Russia. Indeed, Russia's past behavior towards its smaller neighbors and trading partners
demonstrates little reluctance to use bullying tactics to gain uneven economic advantages.
Since the 1990s breakup of the former Soviet Union, Russia has used its control of regional
23Mahmoud El-Gamal and Amy Myers Ja e, Oil, Dollars, Debt, and Crises: the Global Curse of Black
Gold (Cambridge: Cambridge University Press, 2010).
14pipelines to trap Caspian natural gas supplies and to capture the rents from these resources
for its own bene t. For example, until Turkmenistan recently forged new pipeline connections
to China, Moscow's pipeline trading monopoly from the region e ectively locked in cheap
Turkmen gas imports for its own economy at depressed prices of $150 per thousand cubic
meters. At the same time, Russia exported its own gas at twice the pro t to high paying
Western European customers. We conclude that Qatar would be reluctant to form a coalition
with Russia, as history suggests that Russia would use such an alliance to advance its own
economic interests at Qatar's expense.
Will the Status Quo Lead to Price-Wars?
Our analysis so far suggests that the status quo relationship between the world's largest
suppliers of oil and natural gas is stable. However, stability in the status quo con guration
of geopolitical interests does not rule out the possibility of price-wars between the players. We
refer to a price-war as a situation where the oil/gas producing countries competitively reduce
prices in order to make zero sum gains in market share at each other's expense. Moreover,
as it was the case for Saudi Arabia in the 1980s, a price war can be launched to achieve
geopolitical ends. In this section we consider both economic and political considerations
that may lead any of the three countries to wage a price war. We will argue that price wars
are unlikely in the current geopolitical environment. However, we also point out that they
may occur if domestic and international economic and political conditions change.
In principle, each of the three countries can wage a price-war, so we consider all possibil-
ities in turn. We rst discuss the possibility of a price-war in the gas market between Qatar
and Russia, and then discuss the possibility of a price-war in the oil market between Saudi
Arabia and Russia.
We consider a price war in natural gas rst, since major exporters are already under
competitive market pressures from the prospect of rising shale supply. As it can produce gas
at very low cost, Qatar is capable of waging a price-war in the gas market. The purpose of
15such a move could be to crowd-out Russia or other competitors. In a sense, this is the status
quo, as Russia saw a 10 percent drop in exports to Europe in 2010, even after dropping its
own prices considerably. Clearly, Russia has an incentive to change the situation despite
not being able to form a gas cartel with Qatar. Indeed, Russia could respond by slashing
its own prices further, thus, protecting and even expanding its market share and potentially
enhancing its geopolitical ties with new customers. Some of the revenue lost by lower prices
could be made up with higher volumes of sales. Russia might have trouble competing with
Qatar in certain markets, like Asia, given Qatar's extremely low cost of production, but it
could knock out other higher cost producers selling to Europe. Russia could also bene t
geopolitically from this strategy, as the Caspian states, which Russia would like to keep in
its sphere of in
uence, are among the highest cost gas producers. By ending the possibility
of Caspian gas exports to Europe, Russia could weaken ties between the Caspian states
and Europe, leaving the Caspian states more dependent on non-energy trade with Moscow
and thereby giving Moscow greater in
uence in that region. Another geopolitical bene t to
Russia could result if European buyers would eventually be attracted to very cheap Russian
energy supply, improving Russia's ability to woo Europe away from the US alliance. Over
time, as high-cost production (including shale gas) is replaced by supplies from Russia and
Qatar, Russia would again have higher market share and thereby regain more leverage over
a larger number of buyers, possibly winding up better o in the long term despite the short
run loss in revenue.
However, there is one caveat: Increasing production of natural gas will require Russia to
reform its domestic gas policies. This is not a trivial task given the government's concern
for domestic political stability. Gazprom, Russia's state natural gas monopoly, has been
lobbying to o set nancial losses from lower prices and exports to Europe by increasing
prices inside Russia where it makes the bulk of its sales. At present, government-ordered,
subsidized domestic sales prices are set at 55 percent below European market levels. Gazprom
estimates that these domestic-market subsidies have prompted losses of $49 billion over the
last ten years. Such losses have hurt Russias ability to make investments in future production
16capacity. To allow Gazprom to win a gas price-war for European market share, Gazprom
had been pushing the Russian government to gradually increase domestic gas prices to reach
parity with those in Europe. Lifting the price subsidy and reforming the state-controlled gas
transportation network would also allow private Russian entities to increase their natural gas
production and exports. If these reforms were to be adopted, Russia would have a greater
chance of success in a price war with Qatar. Earlier in 2011, Moscow had announced plans
to increase domestic gas prices by 15
Despite the potential downsides to domestic stability, the geopolitical bene ts to Russia
from waging a price war under the current situation could become signi cant if Russia feels
it must protect its long term interests as an energy supplier. Russia could bene t both
economically and geopolitically in the long run if it succeeds in coercing either Saudi Arabia
or Qatar or both into a coalition by creating intense competition for market share. However,
in considering a gas price war with Qatar, Russia has to take into account the impact of
low natural gas prices on its earnings from oil sales. For Qatar, low gas prices could be
bene cial in the long run by enticing more energy buyers. For example, China and Japan,
which currently burn oil for electricity generation and industrial activity, could switch to
natural gas. In that case, lower prices for gas might be made up from higher export sales
for Qatar over the long run. Moreover, rising demand for natural gas at the expense of oil
would eventually bring a recovery in gas prices in the longer term, as Qatar solidi es a larger
market share.
In contrast, for Russia, losing oil market share in order to protect its position in natural
gas will be more costly in economic terms. Russia's receipts from international oil sales
amount to $148.7 billion in 2009, or about 40 percent of Russia's federal budget. Revenues
from natural gas were far lower at $42 billion. For every dollar Moscow earns selling a barrel
of oil to Europe, it earns only 86 cents on the equivalent volume of natural gas exported
there. Thus, to the extent that low gas prices reduce demand for oil and eventually lower
the prices for both oil and gas, Russia would face a higher price for any geopolitical gains
17that might come from higher gas sales. Thus, Russia has to consider a more complex set of
trade-o s.
Either Russia or Saudi Arabia can wage a price-war in the oil market. As mentioned
earlier, Saudi Arabia has already done this successfully in the mid-1980s and again in 1998 in
order to knock out competitors and achieve geopolitical goals. During the 1986 oil price war,
the Soviet Union was constrained by its limited nancial resources and by a badly managed
oil sector to respond to the Saudi challenge. Saudi Arabia at the time had over 7 million
b/d of spare production capacity available to dump on oil markets virtually instantaneously,
while the USSR would have had diculties changing its oil production pro le even over
several years. Today, however, the situation is more equal. Saudi Arabia has less spare
capacity immediately available (only about 1 to 2 million b/d) and it will be quite expensive
for Saudi Arabia to bring on new oil elds. The kingdom spent $14 billion since 2005 trying
to increase its oil production capacity from 10 million b/d to 12.5 million b/d. This proved
dicult and Saudi Arabia, whose capacity is now estimated at 11.5 million b/d, is still
working on the giant Manifa eld to meet its 12.5 million b/d immediate term capacity
target. Future investment in a new tranche of production capacity is likely to be even more
expensive given that the kingdom will have to shift to areas that have more complex geology
and require greater technological intervention.
Moreover, in light of new regional and internal challenges, Saudi Arabia is facing compet-
ing priorities with higher spending requirements on social services and defense. In an e ort
to respond to increased instability across the Middle East, King Abdullah ordered sweeping
spending increases of $67 billion in March 2011 for housing, job creation, and the military,
on top of a $36 billion hand-out to citizens in February. The pressure for higher defense
and social spending will make it harder for the government to justify a massive campaign to
expand its oil sector. Like Russia in the 1980s, it would not be as easy for Saudi Arabia to
mobilize a major price war at this time.
24
24
In fact, some analysts have called into question whether Saudi Arabia will continue to make the massive
investments it will take for the kingdom to carry enough spare productive capacity to make credible a threat
18However, it would be premature to draw the conclusion that Saudi Arabia will no longer
be willing to wage a price war. Its interest to carry the spare capacity to be able to wage
a credible price war goes beyond its security relationship with the United States. Saudi
Arabia gains international clout from its ability to guard the global economy by raising oil
output and lowering oil prices. Moreover, Riyadh's ability to threaten other oil producers
that it could
ood the oil market is a critical aspect buttressing its leadership role inside
OPEC and gives the country regional clout as well. Indeed, among the best levers Saudi
Arabia has to in
uence regional politics is its ability to dramatically lower the price of oil.
For example, Saudi Arabia has made it clear that it aims to draw the line against Iranian
expansionism.
25
Iran is dependent on oil revenues for over 65 percent of its government
revenue. In contrast, the kingdom is in a position to withstand a period of low oil prices.
Thus, Saudi Arabia's ability to wage a price war is a major tool it can use to diminish Iranian
power in the region and weaken Iran's position as a regional military and political rival to
the kingdom. The ability to wage an oil price war also helps the kingdom to guard against
other producers with large oil reserves, such as Iraq, from taking over its oil market share.
In fact, Iraq has expressed the ambition to reach 10 to 12 million b/d of production by 2017.
This level is commensurate with Saudi Arabias capacity. Rising Iraqi output could alter the
balance of political power within OPEC and challenge Saudi Arabia's current leadership.
Iraqi oil reserves are considered very low-cost to develop and are competitive to those of
Saudi Arabia. In summary, while the costs of maintaining enough spare capacity to be able
to wage a price war have risen for Saudi Arabia, there are still many geopolitical incentives
for the Kingdom to maintain this capability. This includes contributing to its security by
weakening Iran and by remaining important to the United States, which would then be more
of an oil price war. As Robert McNally and Michael Levi point out in their Foreign A airs piece \A Crude
Predicament,' \With US-Saudi ties having frayed over the last decade, Riyadh's motivation to continue
contributing to its security partnership with the United States by maintaining spare crude capacity has
diminished...today, Riyadh is less certain about the strength of its alliance with Washington and may thus
be less willing to incur the costs and risks involved in contributing to the US-Saudi partnerships in these
ways (
ooding the oil market).' See Robert McNally and Michael Levi, A Crude Predicament: The Era of
Volatile Oil Prices, Foreign A airs (July/August 2011), p. 100.
25Michael Slackman and Ethan Bronner, \Saudis, Fearful of Iran, Send Troops to Bahrain to Quell
Protests,' New York Times (March 15, 2011).
19apt to provide security guarantees in exchange for the free
ow of oil.
26
We now turn our attention to Russia. Its incentives regarding an oil price war have
also changed since the 1980s. In the 1980s, the USSR state-controlled sector would have had
diculty responding to a price war with higher investment and rising output. The USSR had
severe nancial problems and its aged oil sector was failing badly. In contrast, Russia now has
a relatively reformed and modernized oil sector that could tap private investment if Moscow
provides attractive tax incentives. In 2010, Russia made adjustments to its tax regime to
ensure its oil production stayed above 10 million b/d. Analysts believe that a more positive
tax environment, including exemptions from export duties, would allow Russia to mobilize
new investments quickly, allowing it to raise its production capacity by several millions of
barrels a day. One problem with this strategy is that the Russian government relies heavily
on oil royalties and export taxes to cover its federal budget. Lowering such taxes would be
problematic for Moscow if oil revenues would also be falling due to declining international
oil prices resulting from a price war. It is worth mentioning, however, that Moscow has
tended to favor geopolitical bene ts over economic costs. Recent deals between state-run oil
conglomerate Rosneft and international major oil companies a reversal of past policies that
were designed to renationalize and push the very same companies out of Russia{ indicate
that Russia has an interest in expanding its output, even at the cost of sharing pro ts with
the Western rms.
27
Finally, we cannot rule out the possibility of Russia waging an oil and gas price war
against both Saudi Arabia and Qatar. If both oil prices and natural gas prices go down
at the same time, Russia does not have to worry as much about losing its oil share for
its lesser valued product|natural gas. Though Russia's overall earnings will slide, a price
war in both commodities would imply that structural changes that would lead to natural
gas permanently taking market share from oil would be less likely to take place. At the
26
If Riyadh stays a monarchy and its neighbors turn to democracies, its role will remain important as
increased production might be less likely for its democratic neighbors than for a monarchy.
27Wall Street Journal http://online.wsj.com/article/SB10001424053111904199404576540350519892620.html
20same time, more voluminous, cheap oil and gas exports from Russia might help Moscow
reinstate itself geopolitically in Europe, and to a lesser extent in the United States, as its
cheap energy might prove irresistible despite Russia's threat of the nergy weapon' in recent
international discourse. The EU might try to impose a principled cap on how much energy
it will buy from Russia but the argument will de nitely be made that Moscow could be
counted on to establish friendlier relations, since so much Russian capital would be on the
line given the new production potential. Such a strategy might be even more convincing if
Russia was to achieve higher oil and gas production by allowing foreign direct investment
by European and American oil companies as its recent overtures rst to BP and then to
Chevron and ExxonMobil seem to imply. Utilizing this strategy, Russia might inject itself
in between Saudi Arabia and the United States at a time when US-Saudi tension is rising
over democratization in the Middle East. Russia would also have the bene t of establishing
higher market share, which would eventually re-establish, and even expand, its geopolitical
importance as a major energy supplier to the West. This strategy could be a geopolitical
win-win for Russia if it leads to extra market share, it renders the US and Europe more
dependent on its energy supplies, and it forces Saudi Arabia to consider a larger energy
coalition with Moscow at the helm.
An Extension: The Implications of the Democratization of the Mid-
dle East
Our model's prediction that the status quo alignment of interests in the energy markets
is stable depends critically on the assumption that Saudi Arabia and Qatar view their al-
liances with the United States as central to their geopolitical interests. More speci cally, in
our model this assumption prevents the formation of a coalition between Russia and Saudi
Arabia in the oil market, and between Russia and Qatar in the natural gas market. However,
the Arab awakening, which continues to unfold, may bring signi cant changes to the domes-
tic conditions in many of the countries in the region, including Saudi Arabia and Qatar.
21Such changes would, in turn, create new dynamics in the regional relationships and could
rede ne the countries' economic and security needs. These changes in domestic and regional
conditions are likely to result in a decline in the US in
uence in the region, which would in
turn reduce the geopolitical payo s that Saudi Arabia and Qatar derive from their alliances
with the United States. If this occurs, our model can no longer rule out the possibility of
new stable coalitions involving Russia. We analyze the likelihood of such a scenario next.
The implications of democratization in the Middle East for U.S. in
uence in the region
have already generated much discussion in the media.
28
Such an argument can also nd
support in a prominent empirical nding in the international relations research, which is that
democracies tend not to engage in con
ict with each other (Russett et al.) However, others
have pointed out|in reference to Egypt, in particular|that there is no guarantee that a
popularly elected government will be more friendly to the United States than its autocratic
predecessor.
29
Both sides of these arguments, however, miss a fundamental institutional
di erence between democracies and non-democracies: there are simply more people whose
support is necessary for a government to stay in power in a democracy. We believe that this
di erence could lead to a decrease in the U.S. in
uence in the region, including in issues
related to energy policy.
The thrust of our argument is as follows. A government's survival in a democracy de-
pends on the support of a larger set of the population than that for authoritarian regimes
or monarchies. As some countries move quickly to democracy and others do not, even tradi-
tional monarchies will be forced to broaden political participation within their borders and
widen the distribution of economic bene ts and patronage. For instance, since February
2011, both Saudi Arabia and Qatar have revived suspended local elections. The kingdom
28
For examples, see Daniel Byman, \Beware the Perils of a Libya After Gadda Has Gone,' FT, June 20,
2011; Tony Karon, \Will Egypts Military Hijack Its Revolution?,' Time, July 19, 2011; and James Zogby,
\Diminishing Goodwill for U.S. Middle East Policy,' Foreign Policy, July 15, 2011.
29
In a recent poll, only 20 percent of Egyptians surveyed indicated a favorable view of the United States.
Egypt is already pursuing a foreign policy more independent of the United States. For example, Egypt
brokered a Palestinian unity agreement in May without consulting Washington.
22reintroduced municipal elections this year in response to a number of small protests held
around the kingdom, inspired by protest movements in Tunisia and Egypt. As Saudi and
Qatari leaders take popular sentiments into account, it will become more dicult for the
governments to disregard the reactions of domestic audiences on important economic and
security issues in order to satisfy the policy demands of the United States. Consequently, a
close relationship with the United States may no longer be sustainable, or it might come at
a cost of losing signi cant domestic support.
30
Either way, the payo from cooperating with
the United States may decrease, making alternative policy choices more attractive. This
may include cooperating with Russia to sell oil and gas at higher prices in order to meet
domestic economic and political demands.
31
In what follows we develop this argument more
rigorously, drawing on the theory of political survival proposed by Bueno de Mesquita et al.
(1999, 2003).
32
Bueno de Mesquita et al. (1999, 2003) classify domestic political institutions by de n-
ing two key concepts: the winning coalition and the selectorate.
33
The winning coalition
is the subset of the population whose support is necessary for a leader to stay in power.
30
Some regional commentators are already predicting this outcome: Writes former US foreign policy
advisor Aaron David Miller, \The gaps separating American values, interests, and policies could actually
grow, and the space available to the United States to pursue its policies|from Iran to Gaza to the Arab-
Israeli peace process|could contract. The growing in
uence of Arab popular opinion on the actions of Arab
Governments and the absence of strong leaders will make it much tougher for the United States to pursue
its traditional policies. For America, the Arab Spring may well prove to be more an Arab Winter.' Miller,
Aaron David, \For America, An Arab Winter,' Wilson Quarterly Summer 2011. Elham Fakro and Emile
Hokayem, in \Waking the Arabs,' Survival, April-May 2011, make a similar point about the Arab spring
itself: \Another consequence of the recent unrest is that governments, seeking to re
ect more closely the
views of their populations, will become less pliable regarding Western foreign-policy preferences. As Western
and Middle Eastern values converge, their societies' concept of interests may in fact grow farther apart.'
31Khair El Din Haseeb notes, \Transformation of these regimes into democratic ones which incorporate
the participation of their peoples in primary decision-making processes will preclude their national security
from remaining at the mercy of the United States... The Arab peoples will demand \just prices for their
vital oil and gas resources, commensurate with the price increases of various goods in the West. They will
not permit their regimes to continue to sell oil at current prices.' \On the Arab Democratic Spring: Lessons
Derived,' Contemporary Arab A airs, April 21, 2011.
32
Bruce Bueno de Mesquita, Alastair Smith, Randolph M. Siverson, and James D. Morrow,\An Institu-
tional Explanation of the Democratic Peace,' American Political Science Review, Vol. 93, No. 4 (1999),
pp. 791-808; Bruce Bueno de Mesquita, Alastair Smith, Randolph M. Siverson, and James D. Morrow, The
Logic of Political Survival (Cambridge: The MIT Press, 2003).
33
Ibid.
23The selectorate is the subset of the population from which the winning coalition is drawn.
Democracies have the largest selectorates because they impose the least restrictions on who
can participate in selecting leaders|usually only an age limit, and they also have the largest
winning coalitions|often applying the majority rule to elections. Leaders retain their power
if their winning coalitions are satis ed with the bene ts that the leaders provide for them.
Bueno de Mesquita et al. assume that the bene ts come in two forms: public goods and
private goods. Pubic goods are enjoyed by all members of a society, while private goods can
only be consumed by the member of a leader's winning coalition. Given limited resources at
a leader's disposal, the leader must decide how to allocate the resources between these two
types of goods to maximize her chance of staying in oce. If the winning coalition is small,
then it is optimal to provide private goods to keep the members of the winning coalition
happy. However, if the winning coalition is large, as in a democracy, it is less ecient to
divide limited resources among a large number of people, because the increase in the indi-
vidual bene t can be negligible. Thus, the theory predicts that democratic leaders will be
more inclined to provide public goods whose bene t does not diminish with the increase in
the number of people enjoying them.
Applying the theory of the selectorate and winning coalition, we argue that leaders can
conduct foreign policies with a primary goal of buying support with private goods for their
supporters, or with a goal of providing public goods for the population at large. Traditionally,
the United States has exerted in
uence on the foreign policies of the regimes in the Middle
East by negotiating with a small set of political elites. Such an approach has worked well
because the regimes were autocratic or monarchic, and the political survival of the leaders
only depended on making a small subset of the population; i.e., the winning coalition, happy
with the private goods that they can derive from the policies. Democratization, on the other
hand, means that foreign policies will have to aim at satisfying a signi cantly expanded
winning coalition, which makes providing public goods with foreign policies more attractive
for a government. Providing more public goods requires higher oil revenues, which implies
high oil prices; therefore, a democratically elected government will be much more constrained
24in keeping the prices low in exchange for security bene ts from the United States, especially
if the security bene ts can also come from alternative sources.
Such a shift in the main factor behind foreign policy decision-making will occur if Saudi
Arabia and, to a lesser degree, Qatar becomes more democratic.
34
Even if these countries
remain non-democratic, an increased sensitivity of the ruling class in the two countries to
the preference of a larger segment of the society will have a similar (if smaller) e ect. Saudi
Arabia has already instituted a number of domestic reforms in response to the larger polit-
ical atmosphere in the Middle East. The kingdom implemented a new round of municipal
elections at the end of September, with more than 5,000 men competing in a September 29
poll. According to the electoral commission, more than 1.2 million Saudi men registered to
vote in the polls. The rst phase of the elections were held in April. The elections selected
representatives to ll half of the seats in the kingdom's 285 municipal councils, with the
other half appointed by the government. Women are not allowed to participate in recent
voting, although the King has decreed that women will be allowed to participate in the next
elections, theoretically to be held in another four years.
Besides prompting the Saudi government to reinstitute municipal elections, the tide of
democratization around the region has made the Saudi government realize that handing out
private economic goods just to the elite is no longer sustainable in the Middle East.
35 At
the end of February 2011, King Abdullah announced a $36 billion package of state support
measures, including the creation of a one-year unemployment bene t payment to jobless
Saudis, admission of all Saudis studying abroad into a state scholarship system, codi cation
of a 15 percent increase in government salaries, and increased availability of home loans.
The government also reiterated that it was not going to eliminate an in
ation allowance
that had boosted salaries of state employees by 15 percent over the previous three years,
34
In Qatar, the population is so small, and private bene ts so easy to distribute, that we expect much less
change in foreign policy even if the country is democratized. Qataris will still have security as their number
one concern, and it is likely that US protection will continue to be seen as central towards that goal.
35
The narrow elite that enjoyed private goods from the government of Tunisia is said to be an instrumental
factor leading to the recent demise of former Tunisian President Zine El Abidine Ben Ali.
25with the allowance becoming part of each employee's permanent salary. A second Saudi
tranche announced in March called for an additional $93 billion to be dedicated to social
bene ts. In a set of royal decrees, the Saudi government boosted welfare bene ts, established
a minimum wage of $800 a month for state employees, gave bonuses to public sector workers
and students, and committed resources for new housing. Some $67 billion alone was set
aside for building 500,000 housing units and $4.3 billion was targeted for constructing more
medical facilities. In addition, King Abdullah called for the creation of 60,000 security jobs
within the Interior Ministry and pledged more nancial resources for the religious police.
The combined $130 billion of extra spending amounts to nearly 30 percent of Saudi Ara-
bia's annual economic output. Such generous gestures will no doubt put strains on the Saudi
government budget. Moreover, the living standards for average Saudis have been declining
in the past two decades, with poverty hitting as much as 10 percentage of the population
now from virtually none in the 1980s. Some analysts predict the kingdom will have trouble
maintaining higher spending on social services and military salaries in the coming years, with
rising national budgets requiring $88 a barrel in 2011 to balance expenditures with income
and increasing to $110 a barrel to prevent budget de cits by 2015.
36
In the short-run, the ability of the Saudi monarchy to hold onto the reins of power seem
stable, as economic handouts, targeted repression, and the promise of reform have so far kept
the vast majority of Saudis o the streets. In the long run, however, as expectations of the
population increasingly need to be met with broadly distributed bene ts, higher oil prices
will become a more important imperative for Saudi Arabia, as it seeks popular support,
making a Saudi-Russia coalition much more attractive than it has been in the past.
Moreover, the democratization of neighboring countries around Saudi Arabia and Qatar
will likely change the regional dynamics, creating new security needs that may not be met
36
The Institute of International Finance, an international banking trade group, predicted in its March
2011 report that, while the Saudi government needs to average $88 a barrel for its crude to balance the
budget this year|up from $68 a barrel in 2010|Riyadh will begin facing budget de cits unless it can sell
its oil for an average of $110 a barrel by 2015.
26by the countries' strong relationships with the United States. As we mentioned earlier, we
believe that Saudi Arabia cares about being the spiritual leader of the Arab world as well
as holding on to its market power in the oil market. The desire to be the religious leader
is not merely of symbolic importance to Saudi Arabia; it translates to a political power
that can hold sway over other monarchies and the Arab population at large. This power,
thus, has security implications for Saudi Arabia's internal and external a airs. Such a status
may be undermined if a nearby Arab state becomes democratic, because a democratically-
elected government may be less likely to make foreign policy concessions that are in the
interest of Saudi Arabia and might also undermine its religious leadership. Moreover, any
additional democratically elected Shia governments beyond Iraq will rattle Saudi Arabia
even further out of concern that the government would be under the in
uence of Iran. In
such a scenario, even if Saudi Arabia has the ability to coerce the government to change
policy by military means, such an action is likely to draw criticism from the United States,
as indicated by the reactions of the United States to Saudi Arabia's recent intervention in
Bahrain. While a special security pact with the United States is critical for Saudi Arabia to
counter external military threats, particularly those from Iran, U.S. support for democracy
building is becoming increasingly inconvenient, and potentially even threatening, to the
Saudi monarchy as its citizens watch US support for regime change in more and more regional
countries. Footnote: White House spokesman Jay Carney told reporters that we (the US)
believe that political dialogue is the way to address the unrest that has occurred in the
region in Bahrain and in other countries, and not to, in any way, suppress it. March 14,
2011, The New York Times, David Sanger and Eric Schmitt, U.S.-Saudi Tensions Intensify
with Mideast Turmoil There is no similar democratization concern with respect to Russia.
An important question is whether Russia, if properly motivated, could be more e ective
than the united States in helping Saudi Arabia reduce the Iranian threat. Iran has its own
ambition of becoming the religious leader of the Shiite world, and it desires to challenge
Saudi Arabia's dominance in the international oil market. Moreover, the nuclear weapon
that Tehran is suspected of developing poses a grave threat to Saudi Arabia's national
27security. While the United States has actively engaged the international community to
inhibit Irans ability to attain nuclear weapons by organizing economic sanctions against
Tehran, Russia has tacitly encouraged Iran's policy by providing critical technical assistance
to Irans nuclear program. In fact, Russia has found that its geopolitical power can be
enhanced by maintaining a friendly relationship with Iran while the latter is faced with
isolation in the international community. First, Russia's military cooperation with Iran
poses a threat to its major competing Middle East energy suppliers, namely Saudi Arabia
and Qatar. By backing Iran militarily, Russia gains access to a regional proxy that can
directly in
uence the security of Saudi Arabia and Qatar. This reality acts as a constraint
on Saudi Arabia and Qatar by potentially raising the geopolitical and security costs to pursue
energy policies hostile to Russian interests. Second, by providing technical assistance to keep
Iran's nuclear program alive (but not to the extent that Iran attains the ability to produce
nuclear weapons in the near future), Russia essentially ensures that international economic
sanctions on Iran continue so that Iran does not have opportunities to compete with Russia
in the gas market, speci cally in Europe. In other words, Iran's nuclear program remains in
part a function of Russian assistance, which serves Russia's interest in the energy market.
In addition, the tensions between the United States and Iran over its nuclear program are of
concern to international oil markets, buttressing oil prices and thereby enhancing Russian
oil revenues. Consequently, Saudi Arabia has a clear incentive to woo Russia away from
Iran. To achieve this kind of new realignment, Saudi Arabia has o ered concessions on
arms sales and cooperation in the oil market. According to a report in the Russian daily
Kommersant, Saud Al-Faisal made it clear during a trip he made to Moscow in February 2008
that the kingdom would o er Russia lucrative arms contracts only in exchange for Moscow
curtailing military cooperation with Iran.
37 Under changing political trends resulting from
the Arab Spring, it is conceivable that Saudi Arabia may seek Russia's cooperation on the
Iranian nuclear program by giving in to Russia's push for sharing power in the oil market.
According to some estimates, new trends of oversupply in the international gas market and
37
\Putin meets top Saudi ocial as Russia eyes arms sale,' Agence France-Presse, November 23, 2007.
28delays in Iranian gas export infrastructure development mean that Iran will not be able to
be a serious competitor to Russia in the gas market for at least 15 to 20 years.
38
That means
that Russia's goal of blocking Iranian gas development has largely been achieved, leaving only
other motivations in place. One such alternative motivations underpinning Russias military
and nuclear assistance to Tehran is Irans ability to threaten Saudi Arabia and Qatar militarily
and thereby force them to adjust their oil and gas policies. At OPEC gatherings in the late
2000s, Russian Prime Minister Igor Sechin pressed Saudi representatives for higher oil prices
by describing how such a Russian-Iranian military alliance was adverse to Saudi interests.
Consequently it would not be surprising if Russia would be more amenable to make a deal
with Saudi Arabia for a new coalition on oil prices to be exchanged for its cooperation in
constraining Iran. Such a possibility may imply a signi cant increase in geopolitical payo s
for Saudi Arabia if it considers an alternative coalition with Russia at a time when the
geopolitical payo s for Saudi Arabia from the traditional oil-for-security arrangement with
the United States may be declining. While a stronger coalition between Saudi Arabia and
Russia may not be imminent, a scenario under which such a coalition may become more
compelling in the future appears to be possible.
39
In contrast to Saudi Arabia, the regional dynamics are not likely to change Qatar's
relationship with the United States signi cantly. Qatar is a small and wealthy country
with limited foreign policy goals, the most important of which is to protect its security and
interests against bigger regional powers, namely Iran and Saudi Arabia. Qatar now enjoys
the highest per capita income in the world and with nancial success has come international
prestige, as indicated by hosting important events such as the World Cup. Therefore, its
population is likely to be less concerned about higher gas revenues, especially given the
diculty of achieving that in a well-supplied global market. Thus, security issues loom large
38Medlock, Kenneth, Amy Myers Ja e, and Peter Hartley, \Shale Gas and US National Security.' Working
paper, Baker Institute.
39However, one must also consider that the US-Saudi security relationship is not based solely on the threat
from Iran and that Russia itself has historically been viewed as a military threat to the Saudi kingdom. US
assistance is also important for internal Saudi stability and for Saudi Arabia's ability to combat militant
groups in Yemen and elsewhere in the region.
29and, in this sense, a strong military alliance with the United States is not easily substitutable,
except by a similar alliance with Russia. Given that there is a direct con
ict of economic
interests between Qatar and Russia over natural gas, it is dicult to envision that Qatar
will switch its allegiance to Russia. We conclude that we are far more likely to observe a
Russo-Saudi coalition in the oil market rather than a gas cartel.
Conclusion
In this study we analyzed the likelihood of a new con guration of coalitions that might
emerge in energy markets. We focused our attention to the three most important resource
exporters in the world: Russia, Saudi Arabia, and Qatar. Currently, Saudi Arabia is the
leader of OPEC and, as such, it enjoys monopoly power on setting the oil price. On the
other hand, due to its vast reserves and low production cost, Qatar, as the world's largest
exporter of LNG, has a similar in
uence in the natural gas market. Russia is endowed with
rich reserves of both resources, but has not been able to play the role of an equal partner in
either market due to domestic economic and political constraints. As a result, Russia faces
the risk that Saudi Arabia and Qatar, with backing from the United States, can initiate a
\ two-front war' in global energy markets. Russia has attempted to remove this threat by
creating a gas cartel with Qatar, and also by initiating a discussion of joining OPEC. Neither
e ort has paid o so far.
The starting point of our analysis was to evaluate if these are temporary setbacks for
Russia, or if there is a deeper geopolitical logic to the outcomes. Our model suggests that,
indeed, the geopolitical calculations of Saudi Arabia and Qatar have rendered the status
quo stable. Our analysis was based on a careful consideration of both economic and political
payo s resulting from energy policies. Our approach extends existing research that only takes
economic interests into account. Taking both factors into consideration, we argued that it
is in both Saudi Arabia's and Qatar's interest to maintain close ties with the United States.
This, however, undermines their economic interest in forming a coalition with Russia. We
30argued that the geopolitical payo s have dominated the economic payo s for both countries
thus far.
We provide an analysis of the likelihood of price-wars in energy markets. Our analysis
identi ed two conditions under which price-wars can occur. First, there can be a price-war
in the market for natural gas if Russia is determined to protect, or even increase its market
share in Europe, by knocking out other higher cost producers. We nd that competitive
pressures created by shale gas could make this option more appealing to Russia. Second,
even if it is very costly, Saudi Arabia can use an oil price-war as a foreign policy tool to
weaken Iran's position as a regional military and political rival to the Kingdom. Saudi
Arabia may also use the strategy to guard against other producers with large oil reserves,
such as Iraq, from taking over its oil market share and replacing it as the most important
global supplier to the industrialized world.
Finally, we considered an important recent development in the Middle East that may
change the geopolitical payo s for Saudi Arabia and Qatar|the democratization movement.
According to our model, signi cant changes in geopolitical payo s may bring about new
coalitions involving Russia. Applying the theory of political survival, we argued that any
changes in domestic conditions|even if they are well short of a regime change|give the
rulers of Saudi Arabia and Qatar an incentive to become more sensitive to domestic reactions
to their foreign policies. This trend, we argue, is likely to reduce the payo s resulting from
maintaining special relationships with the United States. Moreover, new security needs due
to changing regional dynamics could give a higher incentive to Saudi Arabia toward a warmer
relationship with Russia. Thus, we cannot rule out the possibility that Saudi Arabia may
form a stronger coalition with Russia in the oil market in the future, possibly by allowing
Russia to join OPEC. We do not envision a similarly signi cant change in Qatar's geopolitical
payo s from its relationship with the United States. Thus, a gas cartel seems unlikely in the
perceivable future.
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