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Simon Watkins

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…

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

  • U.S. Senate Judicial Committee passed the NOPEC bill on Thursday.
  • Washington ups the ante on former Middle East allies.
  • The NOPEC bill could have serious consequences for OPEC as a whole, and for Saudi Arabia in specific.

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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  • Jim Henson on May 07 2022 said:
    So America thinks it can apply internal laws to foreign countries. What a bully!

    Why don't America increases its own production or re-activate Canada keystone pipeline? That is the easiest way to solve the problem for America.
  • Mamdouh Salameh on May 08 2022 said:
    OPEC+ is the most influential and respected player nowadays in the global oil market. It has two major objectives. The first is to look after the interests of its members and this means guiding the market toward an oil price acceptable to the global economy and also high enough to enable OPEC+ members to balance their budgets and invest in exploration and production capacity expansion so as to meet future global oil demand. The second objective is to ensure a balanced market.

    Therefore, the accusations levelled against OPEC by the author that it is indifferent to rising oil prices, continues to deal with Russia and is drifting towards the China-Russia axis of power are misguided, bigoted and stupid. OPEC+ looks after the global oil market in a very responsible and measured way. Even American oil supermajors and the API praised OPEC+ for its handling of the market and prices since the collapse of the market and prices at the height of the pandemic. Russia as a senior member of OPEC+ has played a pivotal role in that direction. Moreover, it is up to OPEC+ members to deal with Russia in the aftermath of the Ukraine conflict. If they haven’t taken sides it is because they have no axe to grind in this conflict. OPEC+ isn’t tilting towards the China-Russia axis of power. It merely accepts that China is the biggest destination for its oil exports.

    The United States can up the ante on its former allies and let loose “the Damoclean Sword of the NOPEC Bill” if necessary but it will amount to nothing.

    1- Even if NOPEC bill becomes a law, it is unenforceable against OPEC since it isn’t a cartel. OPEC has never once tried to fix a specific price nor has ever been able to achieve this goal. For instance, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel nor was it able to stop the 2014 oil price crash. When it comes to limiting oil supply, a true cartel like the “Seven Western Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC has never been in such a situation. It only accounts for 70.1% of global proven reserves, 34.7% of the global oil market and 30.8% of exports according to the 2021 BP Statistical Review of World Energy.
    2- If the United States tries to sue OPEC or any of its members, the organization could stop all its oil exports to the US. NOPEC will only have jurisdiction in the United States but no extraterritorial jurisdiction under international law.
    3- If, however, the United States persists with mounting law suits against OPEC or its members, then they could retaliate by withdrawing their investments and funds in the US and even replace the petrodollar with the petro-yuan. That would be the most serious retaliation against the US. This will literally pull the rug from under the petrodollar and the US financial system it underpins. Once Saudi Arabia and UAE have made the switch, the overwhelming majority of OPEC members will follow suit exactly as happened in 1975.

    The arguments used by the author about the conditions in which the United States may threaten to use the NOBEC bill are most ludicrous and have no place under international law.

    The first is an unsubstantiated claim that Saudi Arabia broke a so-called 1945 understanding between then-U.S. President, Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz bin Saud. Such an understanding isn’t cast in stone. After all it was the United States who broke this understanding by not protecting Saudi Arabia against attacks by Iran’s allies in Yemen, the Houthis. It has been playing Iran against Saudi Arabia since the days of the Shah to demand protection money Mafia-like from Saudi Arabia and the Gulf countries. Moreover, the United States is past master when it comes to walking out of international agreements. It reneged on promises made to Russia under the German unification treaty that US-led NATO won’t expand toward the borders of Russia and yet it did exactly that. What does the author think the cause of the current Ukraine conflict? It also walked out from the Iran nuclear deal?

    The second reason is a study in selfishness and arrogance. The United States wants Saudi-led OPEC particularly Saudi Arabia and UAE to lift their oil production at the risk of tipping the market toward a glut even at the expense of their own livelihood just to save the political future of President Biden.

    The third reason is a flagrant interference in the internal affairs of Saudi Arabia and OPEC. Saudi Arabia and other members of OPEC are sovereign States and it is up to them to choose their partners as dictated by their national interests. After all, the World Order is already moving away from a unipolar system to a multipolar one.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP E
  • James Parks on May 08 2022 said:
    Oh, great... now we'll not only have really high oil prices and accompanying inflation, but our treasury bonds will be sold off as the Saudis and other OPEC members, as well as the Chinese and other foreign investors, scramble to get their money outside of US control. Lots of real estate will be dumped at firesale prices, too. They've just watched us, over the past couple of years, print up $6 trillion to give away as COVID "stimulus". Then they watched the US and Europe casually steal $300 billion in Russian assets. They saw Boeing and Airbus refuse to provide parts and service for jets they sold to Aeroflot. They saw Exxon, Shell, and Chevron walk away from billions and billions in partnership deals -- deals that relied on the expertise of those companies. The list goes on and on.

    Who on Earth is going to want to trust the US or Europe with their money again, or want to buy from us? Why *wouldn't* the Saudis be looking eastward?

    Great opportunities about to arise for Russian and Chinese companies to step into these empty spaces and build their own aircraft, oilfield equipment, etc. industries, though.

    If Biden was trying to destroy the US economy -- and maybe he is -- he couldn't do a better job than he's doing right now.
  • Zeljko P on May 12 2022 said:
    The speed at which the West is destroying the World as we knew it is astonishing, following the current trends, US will not only put this into law but it will pursue its implementation internationally with its dominions. Judging on the West's lawless international behaviour and how they stole Russia's assets OPEC Countries cannot wait but a second, cause they will be stripped of everything they ever brought to the West. And don't get lulled into thinking "surely they could not do this to us" and be complaisant, cause there is a massive risk of loosing everything...

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