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NOPEC: America's Last Stand Against OPEC’s Drift To The East

The passing on Thursday by a U.S. Senate committee of the ‘No Oil Producing or Exporting Cartels’ (NOPEC) bill is the surest sign yet that Washington has finally run out of patience with Saudi Arabia and with the Saudi-led Organization of the Petroleum Exporting Countries (OPEC), in their indifference to dealing with high oil prices, their continued dealings with ‘OPEC+’ key member Russia, and their ongoing drift towards the China-Russia axis of power. Washington has decided that the time might be right to up the ante on its former allies and let loose the Damoclean Sword of the NOPEC Bill if necessary, it seems.

The ante is huge for Saudi Arabia, OPEC, and OPEC+’s key member, Russia, as the NOPEC Bill, as analysed in depth in all of my books on the oil sector since 2014, including at length in the most recent one, has a broad mandate allowing it to declare it illegal to artificially cap oil production or to set prices. OPEC was specifically mandated upon its foundation in 1960 to ‘co-ordinate and unify the petroleum policies’ of all of its member states – effectively fixing oil prices. Given that OPEC’s members account for around 40 percent of the world’s crude oil output, about 60 percent of the total petroleum traded internationally from their oil exports and just over 80 percent of the world’s proven oil reserves, its influence on the global oil market has been cartel-like. The NOPEC bill, if and when enacted, would immediately dramatically inhibit any and all actions or statements from OPEC specifically, and its key members, and its de facto leader Saudi Arabia. This would include coordinated oil production cuts or increases and statements relating to where the organisation or any of its key members, including Saudi Arabia, forecast production levels or oil prices to be in the future. It would also immediately remove the sovereign immunity that existed in U.S. courts for OPEC as a group and for its individual member states. This would leave Saudi Arabia open to being sued under existing U.S. anti-trust legislation, with its total liability being estimated at US$1 trillion of investments in the U.S. alone, as also analysed in depth in my new book on the global oil markets.

Related: OPEC Stays Silent As EU Rushes To Ban Russian Oil

For Saudi Arabia, it would also mean that the effective value of its flagship oil and gas giant, Saudi Aramco could be zero, given that it is the key corporate instrument used to manage the oil flows of the de facto leader of the world’s leading de facto oil cartel. Although Saudi Aramco is not directly involved in making the policy, the anti-trust legislation of the U.S. and U.K. can point to Aramco as being collusive in price-fixing through adjusting its output to help manage oil prices and by its key corporate officers making statements about future production levels of the company and its price expectations. This view is further bolstered by the fact that such a small percentage of its shares were floated in the initial public offering in December 2019 and that it was made clear at the time of the offering that the company would remain operationally directed by the government of Saudi Arabia. Indeed, Saudi Aramco's chief executive officer, Amin Nasser, said at the time of the IPO that Saudi Aramco’s oil and gas production decisions were sovereign matters that would remain with the government. It would also mean that trading in Aramco’s products – including oil – would be subject to the anti-trust legislation, meaning the prohibition of sales in U.S. dollars. It would further mean the eventual break-up of Aramco into much smaller constituent companies that are not capable of influencing the oil price, if the Saudis could offer up no other way of complying with the anti-trust laws.

That the situation should come to the final use of the NOPEC Bill threat is a function of three factors. The first was the breaking of the core 1945 agreement struck between then-U.S. President, Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz on board the U.S. Navy cruiser Quincy in the Suez Canal. The deal that they agreed, which ran relatively smoothly for years, was that the U.S. would receive all of the oil supplies it needed for as long as Saudi had oil in place, in return for which the U.S. would guarantee the security of both of the ruling House of Saud and, by extension, Saudi Arabia. Although there was a bump in the road with the 1973/4 Oil Embargo, the real challenge to this agreement came in the 2014-2016 Oil Price War initiated by Saudi Arabia with the principal aim of destroying or at least severely disabling the then-nascent U.S. shale oil sector. From the earliest days especially of former President Donald Trump’s administration, the threat of passing of the NOPEC Bill was used to ‘persuade’ the Saudis into adhering to the ‘Trump Oil Range’ – a floor of US$35-40 per barrel of Brent (the price above which most U.S. shale oil producers could make a profit) and cap of US$75-80 pb (above which there were likely to be negative economic effects to the U.S.). Related: China’s Biggest Refiner Has No Plans To Scoop Up Cheap Russian Oil

The second reason is the apparent indifference of the Saudis and OPEC to help to lower oil prices right now, to the extent that Saudi Crown Prince Mohammed bin Salman (and the Crown Prince of Abu Dhabi, Mohammed bin Zayed Al Nahyan) even refused to take an urgent telephone call on the subject from President Joe Biden. For the U.S. economy, 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. Politically, 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. President Biden – or whoever 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. 

The third reason for the U.S.’s rising fury over the disregard of Saudi Arabia and OPEC for previous agreements and assurances made with the U.S. is that all the while they have been moving closer to the China-Russia axis of power and Washington now fully sees this as having reached a political inflection point that morphs into a true ‘zero sum game’. Saudi Arabia has pushed for a broadening and deepening in the cooperation of the Arab states both in general terms and specifically via the Gulf Cooperation Council (GCC), and has appeared to be drifting further toward China’s sphere of influence since at least 2016. This was highlighted recently by the recent series of 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

The ‘NOPEC Bill’ has come very close to being fully enacted before, most notably in February 2019 when it was passed by the U.S.’s House Judiciary Committee, which cleared the way for a vote on the Bill before the full House of Representatives. On the same day, Democrats Patrick Leahy and Amy Klobuchar and – most remarkably – two Republicans, Chuck Grassley and Mike Lee, introduced the NOPEC Bill to the Senate. This time around, the ‘NOPEC Bill’, sponsored by senators, including Republican Chuck Grassley and Democrat Amy Klobuchar, passed 17-4 in the Senate Judiciary Committee. From this point, presumably if Biden’s administration does not think that Saudi Arabia and OPEC will become more cooperative in the future, then ‘NOPEC Bill’ would go to the full Senate and House and then be signed by President Joe Biden to become law.

By Simon Watkins for Oilprice.com

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Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More