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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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Trump’s Ultimate Weapon To End The Oil War

U.S. President Donald Trump is facing increasing calls from some U.S. senators and congressmen to pressure Saudi Arabia into ending the oil price war, with one of his own Republican party - Senator Kevin Cramer – last week urging him to impose an embargo on oil imports from Saudi Arabia, Russia and other OPEC nations. It is not because the U.S. shale producers cannot deal with a much lower sustained oil price environment as they can. It is because in order to cope with this environment, capital expenditure will have to be trimmed back to the sorts of ratios seen the last time that the Saudis tried the same thing from 2014 to 2016. The U.S. shale sector won last time and it will win this time (along with Russia) but behind the scenes, the U.S. Presidential Administration is also being advised that it already has the ultimate weapon to make Saudi Arabia end the oil price war right now, OilPrice.com understands from legal sources in Washington. The weapon is the ‘NOPEC Bill Bomb’. The ‘NOPEC Bill Bomb’ refers specifically to the ‘No Oil Producing and Exporting Cartels Act’ (NOPEC) that was last threatened by the U.S. in October 2018 when the Saudis had enabled the Brent oil price to remain above the key US$70 per barrel level since March. Any sustained Brent price above US$70 per barrel was – and is – regarded by the current Presidential Administration as being in an area where the benefits to U.S. shale producers of higher prices are outweighed by the relative damage done to the U.S. economy. More specifically, it is estimated 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, 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. As Bob McNally, the former energy adviser to the former President George W. Bush put it: “Few things terrify an American president more than a spike in fuel [gasoline] prices.”

In any year, this is bad news for the sitting U.S. President but at that specific point in 2018 when the U.S. (in March) was looking to re-impose sanctions on Iran just a couple of months later “it looked like Saudi was taking advantage of the U.S. position, rather than helping its most important ally,” as one senior Washington-based legal source told OilPrice.com last week. “It came at a time when we were concerned anyway that the Saudis were becoming too dependent on Russia because of the OPEC-plus deals and were listening too much to its [Russia’s advice],” he added. With the oil price during the March-October period consistently well above US$70 per barrel of Brent and in September trading at nearly US$85 per barrel and looking like it was going higher, Trump warned Saudi Arabia’s King Salman that: “He would not last in power for two weeks without the backing of the U.S. military.” This was also the occasion when the Saudis were remainder of the NOPEC Bill, according to the legal sources in Washington.

Related: Russia Moves In On European Gas Markets As Oil Prices Crash

Specifically, the NOPEC bill would make it illegal to artificially cap oil (and gas) production or to set prices, as OPEC and Saudi Arabia do. It would also now work as a very neat trick to prevent Russia from resuscitating OPEC+, rather than just OPEC, as if it did then it too would face the consequences of the NOPEC Bill, once it was approved and became the NOPEC Act. The bill would also immediately remove the sovereign immunity that presently exists in U.S. courts for OPEC as a group and for each and every one of its individual member states. This would leave Saudi Arabia, for instance, open to being sued under existing U.S. anti-trust legislation, with its total liability being its estimated US$1 trillion of investments in the U.S. alone. The U.S. would then be legally entitled to freeze all Saudi bank accounts in the U.S., seize its assets in the country, halt all use of U.S. dollars by the Saudis anywhere in the world (oil, of course, to begin with, is denominated in U.S. dollars), and to go after Aramco and its assets and funds, as it is still a majority state-owned production and trading vehicle. It would also mean that Aramco could be ordered to break itself up into smaller, constituent companies that are not deemed to break competition rules in the oil, gas, and petrochemicals sectors or to influence the oil price. Up until recently, the bill was progressing at a pace through the U.S. system and came very close indeed to being passed into law before Trump stepped in and vetoed it after the Saudis did what he told them to do. In February of last year, the House Judiciary Committee passed the NOPEC Act, 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. Even before this, the full approval of the Bill has only been stopped by the President. In 2007, the full House of Representatives and Senate passed the NOPEC legislation and it was passed again in 2008 by the House. In terms of presidential views on the Bill, George W. Bush always threatened a veto and Barack Obama opposed it, but Trump has veered from initially being against it to being a lot less clear.

Related: Rig Count Plummets As Oil Price War Rages On

Aside from the various threats to King Salman whenever oil prices have come near to the US$70 per barrel level, and the increasing omni-toxicity of Saudi Crown Prince Mohammed bin Salman – documented here - Trump also, understandably, has a big problem with OPEC. Since the U.S. unilaterally withdrew from the Joint Comprehensive Plan of Action (Iran nuclear deal) in May 2018, Trump has regarded OPEC and Saudi as “looking to take advantage of the short term supply constraints [at that time] that resulted from the U.S.’s attempts to force Iran back to the negotiating table for a better deal for the U.S. by imposing sanctions on it,” according to one of the Washington-based legal sources. In addition to telling Saudi Arabia’s King Salman that he and his family would not be in power without U.S. support – entirely true, incidentally – Trump also blamed OPEC via Tweets for the 2018 multi-month oil price spike. He said: “Looks like OPEC is at it again. With record amounts of Oil [sic] all over the place, including the fully loaded ships at sea, Oil [sic] prices are artificially Very High [sic]! No good and will not be accepted!” He later added at the U.N. General Assembly in September 2018 that OPEC is “ripping off the world.” Shortly after this, Trump told reporters when asked about the NOPEC Bill specifically: “The United States is firmly committed to open, fair, and competitive markets for global energy trade. We do not support market-distorting behaviour, including cartels.” Quod erat demonstrandum.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on March 22 2020 said:
    In normal circumstances Saudi-led OPEC would ignore Trump’s threat of NOPEC bill against them as OPEC is not a cartel and has never been a cartel throughout its history.

    But we are not in normal times. OPEC has been weakened by the slide of oil prices and Saudi Arabia is being weakened by its senseless and unwinnable oil price war against Russia. So Saudi Arabia might just make use of the excuse of US pressure on it to save face and stop the price war particularly that the US shale oil industry is becoming the biggest collateral casualty of this war. And who knows, Saudi Arabia might even extend a hand of cooperation to Russia to resume their joint efforts to stop the slide of oil prices.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Wayne Briggs on March 22 2020 said:
    Very good article Simon thank you for your perspective and research.
  • el Cee on March 23 2020 said:
    Trump is ill-equipped to deal with international matters.

    Two things Trump must do , immediately.

    1) stop all trade wars and return to a free trade posture regardless of what hid brainless hawks whisper in his ears,

    2) reduce oil production from shale to pre 2016 levels as a sign of good faith. And to get some time to negotiate an agreement with all parties involved in the oil sector. This agreement should be for 5 years and set a fixed price. Not only will this stabilize the situation, it will give all parties a path to sensible growth and profitability.

    He needs to understand, war is a very real possibility in the Middle East.
  • Elliott Silverman on March 23 2020 said:
    Very interesting analysis - thank you for your insights.
  • STEVEN MACKIE on March 23 2020 said:
    OPEC+
    How about they kick Russia out and the US becomes the +
    All 3 are about the same size, right.
    No need to bully just move closer.
  • Clyde Boyd on March 23 2020 said:
    Very few consumers have any sympathy for the Saudis. They have repeatedly gouged us for over 40 years with their cartel. And any absurd claims that OPEC is not a cartel is pure propaganda designed to prop up Middle East oil interests.
  • Anthony Okrongly on March 23 2020 said:
    Here's an idea, let capitalism work. The lowest priced producers with the highest margins WIN. Marginal suppliers can make marginal money on the margins. Regional players who have some ability to take advantage of regional needs without transport get to use that advantage. WE created an artificial oil production system based on an artificial interest rate then we overproduced to beat the band and now we are wondering why it's collapsing.

    Make no mistake The Idiot will do Idiotic things to try to get Saudi Arabia to coddle the Idiot Companies in American who exist only because of Idiotic policies of debt and money printing. So, yea, he will do something. Hey! Let's invade Iraq!!! That'll solve it.
  • Some Body on March 23 2020 said:
    How about stopping petroDollar, and starting
    PetroYuan?, usa economy will collapse in one day...

    And btw usa import 9 % of saudi arabia oil, so it's not like the end if the world for Saudi arabia, but the first scenario is the end of the world for usa

    So it's better for them to stop bullying, because it's not the only major power as it's used to be...
  • Ken Proffitt on March 24 2020 said:
    Doesn’t make sense to me. Threaten NOPEC Bill bc peices are too high then bc prices are too low. If the bill prevents artificial cap on producing wells then that is where we are already at pumping wide open. Not to mention there’s no sense in stepping in until the reserves are capped off at the cheapest price.
  • Jim Mareshe on March 24 2020 said:
    Let the market fall.
    The people can deal with it better than they deal with the virus!
  • E.M. Shalev on March 27 2020 said:
    By definition, OPEC is a Cartel. Here is the Wikipedia definition of Cartel which is consistent with most dictionary definitions of the word:

    "A cartel is a group of an independent market participants who collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Most jurisdictions consider it anti-competitive behavior. Cartel behavior includes price fixing, bid rigging, and reductions in output. States that pursue economic interests may form cartels such as the Organization of the Petroleum Exporting Countries (OPEC). The doctrine in economics that analyzes cartels is cartel theory. Cartels are distinguished from other forms of collusion or anti-competitive organization such as corporate mergers."
  • Sean Pruitt on March 27 2020 said:
    It's interesting how Russia is open to chatting with OPEC after fresh sanctions on Iran, Indictments on Muduro and following the meeting of Mike Pompeo and Saudi Prince.

    I honestly doubt Trump will use NOPEC as the whole world would hate us for it. I personally think Trump is going to sit back and let Russia and Saudi's tire them selves out.

    Putin Might be as so bold as to drop bombs on key oil fields using his proxies AGAIN when Iran bombed Saudi oil fields. MAYBE???

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