The longer that high oil and gas prices are sustained, the greater the economic damage for highly developed and industrialized countries that are not self-sufficient in energy supplies and it is at times like these that those countries find out who their real friends are, and are not. In this context, the current oil pricing/global economic matrix underlines once again the seismic geopolitical shift that has taken place in the Middle East since the end of the 2014-2016 Oil Price War – broadly away from the U.S. and its allies and towards the China-Russia sphere of influence - with both Saudi Crown Prince Mohammed bin Salman and the UAE’s Sheikh Mohammed bin Zayed al Nahyan reportedly unavailable to talk to U.S. President, Joe Biden, about how they could help to lower oil and gas prices. This means that Biden is now considering “all options [for lowering oil and gas prices on a sustained basis] that are not directly connected to Russia,” according to a senior energy source close to the European Union leadership spoken to exclusively by OilPrice.com last week.
Several countries in the region that had been regarded by Washington as reliable allies over the years – and which have taken huge sums of financing, technology, and military support from the U.S. and its allies for decades – have sought to portray this extraordinarily significant geopolitical shift since 2016 as simply being a move towards a more ‘balanced approach to the West and the East. Such portrayals are disingenuous and in reality reflect only the twin awareness that at this point in history it is still unwise to incur the anger of the U.S. and that China is not yet ready to assume the mantle of top global superpower. Another recent sign of their increasing confidence in being able to treat the U.S with the contempt evident in declining to take calls from President Biden was the high-level meetings in Beijing between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, Bahrain and the secretary-general of the Gulf Cooperation Council (GCC). At these meetings, the principal topics of conversation were to finally seal a China-GCC Free Trade Agreement and “deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat,” according to local news reports. Another was the news just before Christmas that Saudi Arabia is now actively manufacturing its own ballistic missiles with the help of China, and the similarly recent discovery by the U.S. that China may have been in the process of building a secret military facility in the UAE port of Khalifa. As also examined in depth in my new book on the global oil markets, such moves by Saudi Arabia have grown increasingly bold ever since Russia stepped in to prop up the credibility of Saudi Arabia and OPEC after both were shattered in the disastrous aftermath of the 2014-2016 Oil Price War.
With Saudi Arabia and the UAE having shown such disrespect to the U.S. – and OPEC+ having done the same with its simply rolling over the 400,000 barrels per day (bpd) production increase that was ineffective at bringing oil prices down even before they spiked again after Russia invaded Ukraine – the pressure on Biden to look for help elsewhere is now more intense than ever. Biden knows full well that the economic damage that will result from continued high oil and gas prices for the U.S. and its allies is enormous (Russia and OPEC know this too). Historical precedent highlights that every US$10 per barrel change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline. The corollary longstanding rule of thumb is that for every one cent that the U.S.’s average price of gasoline increases, more than US$1 billion per year in discretionary additional consumer spending is lost.
The political risk for Biden of enduring high oil and gas prices is also huge. It is a matter of historical fact, as shown in my new book on the global oil markets, that since World War I, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within two years of an upcoming election. However, presidents who went into a re-election campaign with the economy in recession won only once out of seven times (Calvin Coolidge in 1924, although strictly speaking he had not won the previous election but rather had taken up the position on the death in office of Warren G Harding). President Biden – or whomever the Democratic candidate may be – will face another presidential election in 2024, but even before that he faces critical mid-term elections in November 2022, when his Democrats could lose their narrow majority in the House of Representatives.
Given these unenviable prospects, then, there are three main options to reduce oil and gas prices to less economically and politically damaging levels right now, given that a potential fourth option – of encouraging more output from U.S. shale producers - seems stretched currently. First, although the U.S. only just committed to a release of 30 million barrels of oil from its Strategic Petroleum Reserve (SPR), as part of a globally coordinated release of over 60 million barrels led by the International Energy Agency (IEA), U.S. Energy Secretary Jennifer Granholm said on 9 March that it may have to do the same again, depending on market conditions. Only a day before that, IEA executive director, Fatih Birol, stated that the organization is ready to release as much oil as is needed and that 60 million barrels were only 4 percent of IEA members’ total strategic oil reserves. As highlighted some time ago by OilPrice.com, it is interesting to note how ill-thought-through airy-fairy green energy initiatives disappear in the cold hard light of political self-interest. The ‘danger zone’ for U.S. presidents has historically started at around US$3.00 per gallon and at US$4.00 per gallon they are being advised to pack their bags in Pennsylvania Avenue. The point was underlined by Bob McNally, the former energy adviser to the former President George W. Bush that: “Few things terrify an American president more than a spike in fuel [gasoline] prices.”
A second option is to conclude a new iteration of the Joint Comprehensive Plan of Action (JCPOA, colloquially the ‘nuclear deal’) with Iran, and this is “tantalizingly close”, according to sources close to the deal spoken to exclusively by OilPrice.com. In this scenario, Iran could see an 80 percent recovery of full production within six months and a 100 percent recovery within 12 months, with Iranian production increasing by as much as 1.7 million bpd (including 200,000 bpd of condensate and LPG/ethane), in a 6 to 9 month period from when sanctions are lifted and an immediate impact of a 5-10 percent fall in the oil price. For obvious reasons, Moscow is currently in the process of trying to destroy or delay the chance of this happening, with Russian Foreign Minister, Sergei Lavrov, on 5 March, demanding “written guarantees” that Western sanctions over Ukraine “will by no means affect our right to free and full-fledged trading, economic, investment, military and technical cooperation with Iran.” Russia is one of the five countries that constitute the United Nations Security Council (UNSC) – the others being the U.S., U.K., France, and China – that signed the original JCPOA, along with Germany, and would seemingly be required to sign any new deal. It may be, though, that a new form JCPOA might be done between the other four UNSC members plus Germany, omitting Russia. Additional attempts to sabotage a new deal – as highlighted with Iran’s attack over the weekend on a U.S. consulate complex in the northern Iraqi city of Erbil - come from elements of Iran’s Islamic Revolutionary Guard Corps who see such a deal as a threat to the continuation of their own business interests.
The third option that has appeared in earnest over the past week is to partially lift the current U.S.-centric sanctions on Venezuela, which has the largest amount of oil reserves in the world – at 304 billion barrels, according to BP and others’ statistics. According to several reports last week, Venezuela has released two jailed U.S. citizens following talks with a high-level U.S. delegation in Caracas. White House Press Secretary, Jen Psaki, confirmed that “energy security” was one of the issues raised at the talks in Caracas. In the first instance, if U.S. sanctions were partially lifted allowing for oil exports to resume from Venezuela, the expectations are that they would go to the U.S. itself to compensate for lost supplies from Russia, following Washington’s recent ban on oil imports from there but this would, in any event, have a ripple effect on oil prices elsewhere.
By Simon Watkins for Oilprice.com
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