The surprise huge new cut in oil production from ‘OPEC+’ - the Saudi Arabia-led OPEC group of countries ‘plus’ Russia - highlights that any optimism over a possible rapprochement between Saudi Arabia and its previous key superpower ally, the U.S., is ill-founded. Instead, newly emboldened by the Beijing-brokered Saudi Arabia-Iran deal to resume relations, followed by the approval of a plan to join the Shanghai Cooperation Organisation (SCO) as a ‘dialogue partner’, Saudi Arabia has now decisively shifted into the China-Russia sphere of influence. Prior to the surprise additional oil production cut by OPEC+ announced on 2 April, early February had seen Saudi Arabia lead its OPEC fellow members and OPEC+ into sticking with its previously agreed oil production cuts quota of 2 million barrels per day (bpd). This cut represented only around 2 percent of the recent historical mean average of supply in the global oil market. Additionally, it left oil prices at levels that barely helped Saudi Arabia in budgetary terms at all, with a fiscal breakeven oil price forecast of US$78 pb of Brent in 2023, compared to over US$80 pb of Brent in the previous year. Significantly as well, oil prices at that point in February were way below the level that Russia wants, with a fiscal breakeven oil price of US$114 pb of Brent this year, up from around US$64 pb before its invasion of Ukraine. It was thought then by several oil market observers that the oil production in February by OPEC+ might have been a sign that Saudi Arabia was open to thawing out frozen relations with the U.S.
What changed between February and April was the Saudi Arabia-Iran resumption of relationship deal, brokered by China. Although at the time of the announcement of the deal, White House national security spokesperson, John Kirby, tersely observed that the deal done on 10 March between Iran and Saudi Arabia to re-establish relations “is not about China”, it absolutely was about China. What it absolutely was not about was the U.S. The biggest diplomatic coup in the Middle East since at least the signing of the Joint Comprehensive Plan of Action (JCPOA) between the P5+1 powers and Iran in 2015 had been brokered by China, without any involvement at all from the U.S., and every country in the world and in the Middle East knew it. The landmark deal between the two longstanding arch-regional enemies – Shia Iran and Sunni Saudi Arabia – was just the sort of far-reaching geopolitical coup that the U.S. had wanted to achieve in its ‘relationship normalisation deals’ program that had followed its unilateral withdrawal from the JCPOA in May 2018, as analysed in depth in my latest book on the global oil markets. In short, at that point more than any other of the major advances that the China-Russia axis has made in the Middle East, it was clear that this axis was winning the superpower battle for the Middle East and not the U.S. and its allies.
Saudi Arabia and Russia know perfectly well that the U.S. and its major allies do not want oil prices over US$80 pb of Brent. For the U.S. and its allies, sustained oil prices above that level, and corollary rising gas prices, mean that inflation will remain higher for longer, which will keep interest rates higher for longer, which increases the threat of severe economic damage to net importers of either. For the U.S. these fears have very specific ramifications: one economic and one political, as also analysed in depth in my latest book on the global oil markets. The economic one is that historically every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost and the U.S. economy suffers. The political one is that, according to statistics from the U.S.’s National Bureau of Economic Research, since the end of World War I in 2018, 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, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven. This is not a position sitting President Joe Biden, or the Democratic Party, wants to be in one year out from the next U.S. election.
The U.S., since the end of the Second Oil Price War that ran from 2014-2016 – instigated by Saudi Arabia with the specific intention of destroying or disabling the threat from the then-nascent U.S. shale oil sector – has wanted oil prices in a Brent price range from US$40-45 pb on the floor to US$75-80 pb on the ceiling, as also analysed in depth in my latest book on the global oil markets. This ‘Trump Oil Price Range’ was set at the lower end to reflect the price at which most U.S. shale oil producers could breakeven and begin to make a decent profit at that stage (US$40-45 pb) and at the higher end to reflect the price at which the inflation/interest rate mix might begin to threaten the U.S. economy. For many years before the Second Oil Price War, Saudi Arabia’s budget breakeven Brent oil price was about US$80 pb and for many years after the War it was well over US$84 pb.
Given these economic and political necessities in the U.S. and its allies, former President, Donald Trump, rigorously enforced the price range. When Saudi Arabia (with the help of Russia) was pushing oil prices up over the US$80 pb of Brent level in the second half of 2018, President Trump sent a clear warning to Riyadh to stop doing this. In a speech before the United Nations General Assembly, Trump said: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it.” He added: “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” As the Saudi Arabian- and Russian-led OPEC+ oil production cut agreement continued to push oil prices up in September 2018 to slightly over the ‘Trump Cap’, Trump made the same warning again, even more clearly at a rally in Southaven, Mississippi, in October 2018. He said: “And I love the king, King Salman, but I said, ‘King we’re protecting you. You might not be there for two weeks without us.’” In short, during Trump’s entire presidency, the ‘Trump Oil Price Range’ was breached only once for a period of around three weeks (toward the end of September 2018 to the middle of that October).
Saudi Arabia’s malleability at that point to Trump’s (and the U.S.’s) wishes for the oil price was due in very large part to the fact that it was still heavily reliant on the U.S.’s protection, principally from its main regional threat, Iran. At that stage, the U.S. and its allies could offer protection to Saudi Arabia from Iran through several methods. One was monitoring, as laid down in the Joint Comprehensive Plan of Action between the P5+1 group of nations (U.S., U.K., France, China, and Russia, ‘plus’ Germany) and Iran. Another method was U.S. and allied forces on the ground across the Middle East.
This leverage over Saudi Arabia ended, firstly with the U.S.’s unilateral withdrawal from the JCPOA and secondly with the Iran-backed Houthi attacks on Saudi Arabia’s key oil facilities in September 2019). Saudi Arabia was not then reassured either by the U.S.’s withdrawal from Syria (in 2019), Afghanistan (2021), and Iraq (2021). It was obvious to Saudi Arabia from the Iran-backed Houthi attacks on its oil facilities in September 2019 that it could not rely on the U.S. and its allies for its protection and alighted instead on Russia and China. Russia had already helped Saudi Arabia out by supporting it from the end of 2016 in the newly formed OPEC+ grouping, which was instrumental in allowing Saudi Arabia to rebuild its finances after the Second Oil Price War. China had made a face-saving offer to Saudi Arabia’s Crown Prince Mohammed bin Salman that he had never forgotten, as also analysed in depth in my latest book on the global oil markets. It is little wonder then that Saudi Arabia now holds the U.S. and its allies in such contempt that he refused even to take a telephone call from President Biden just after Russia had invaded Ukraine in which the President wanted to ask for Saudi Arabia’s help to bring oil prices back down.
By Simon Watkins for Oilprice.com
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