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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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How Saudi Arabia Put OPEC's Future At Stake

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OPEC’s 60th birthday should have been reason for celebration, but its largest producer Saudi Arabia is increasingly putting its own interests before the cartel’s objectives and has put the very existence of OPEC at stake on a number of occasions

Founded 60 years ago this month by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, the Organization of the Petroleum Exporting Countries (OPEC) originated from a solid base of sensible values centred upon providing a collective voice for oil producers that were being exploited by the ‘Seven Sisters’ group of international oil companies. Its stated mission was to: “Co-ordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.” For nearly 55 years it was broadly able to achieve these aims, buoyed by its members accounting for around 40 per cent of the world’s crude oil output and about 60 per cent of the total petroleum traded internationally. In 2014, though, OPEC’s de facto leader, Saudi Arabia placed its own interests above those of its fellow OPEC members, since which time the Kingdom has betrayed the group on two more notable occasions and jeopardised its very existence.

Prior to 2014, OPEC had managed to turn the tables on the Seven Sisters group of major oil companies, comprising the Anglo-Persian Oil Company (now BP) and Royal Dutch Shell (RDS), plus three iterations of Standard Oil (Standard Oil of California, Standard Oil of New Jersey, and Standard Oil Company of New York), plus Gulf Oil, and Texaco. At one point, these seven companies controlled at least 85 per cent of the world’s petroleum reserves, having often paid the host countries a minimal percentage of the resulting sales profits in return. This compensation model dated from the first major oil discovery (the Masjed Soleiman field) made by a modern foreign oil company (the Anglo-Persian Oil Company) operating in the Middle East (modern-day Iran). Iran’s 16 per cent share of the profits from its oil before 1951 (when the Iranian parliament voted to nationalise the British company due to its paltry payout) looked positively generous when compared to Standard Oil’s payment of US$275,000 in April 1933 (equivalent to around US$6 million in 2020) to Saudi Arabia to secure the exclusive rights to drill across the entire country. As a portent of the geopolitics of the global oil market to come, the then-Prime Minister of Iran, Mohammad Mosaddegh, was removed in 1953 by a military coup – ‘Operation Ajax’ - organised jointly between the U.K.’s Secret Intelligence Service and the U.S.’s Central Intelligence Agency after he had nationalised the Anglo-Persian Oil Company’s local infrastructure assets, and renamed it the National Iranian Oil Company. After the formation of OPEC, though, the influence of the Seven Sisters began to markedly decline. Related: Colombia’s Security Crisis Deals Another Blow To Its Oil Industry

The real turning point for OPEC as an international commercial and geopolitical force came in October 1973 when OPEC members plus Egypt, Syria and Tunisia began an embargo on oil exports to the U.S., the U.K., Japan, Canada and the Netherlands in response to the U.S.’s ongoing supply of arms to Israel in the Yom Kippur War. The spike in oil prices was exacerbated by incremental cuts to oil production by OPEC members over the period and, taken together, by the end of the embargo in March 1974, the price of oil had risen from around USD3 per barrel to nearly USD11 per barrel and then it trended higher again. This in turn stoked the fire of a global economic slowdown, especially felt in the West. In the process, the balance of power between the big developed market-consumers of oil and the big emerging market-producers of oil had shifted, as highlighted by the Saudi Minister of Oil and Mineral Reserves at the time, Sheikh Ahmed Zaki Yamani.                                                                    

In 2014, though, at a series of high-profile meetings with bankers and fund managers in New York and London, various senior Saudi officials made it clear that, regardless of the economic and financial consequences to its fellow OPEC members, the Kingdom would instruct them to massively overproduce crude oil in order to crash oil prices in order to destroy the then-nascent U.S. shale oil sector. For the U.S., the instigation of this oil price war by the Saudis was an unforgivable betrayal of the trust in Saudi Arabia that had been implicit in the deal agreed in 1945 between the then-U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz. This deal had been that the U.S. would guarantee the security both of the ruling House of Saud and, by extension, Saudi Arabia, in exchange for which the U.S. would receive all of the oil supplies it needed for as long as Saudi had oil in place. After some initial success – the U.S. oil rig count in January/February 2015 saw its biggest period-on-period fall since 1991 – the Saudis found by 2016 that all that they had done was help to shape a much more cost-efficient U.S. shale oil sector that could survive above US$35 per barrel of WTI, compared to pre-2014 estimates of a US$75+ per barrel. In the process, according to the IEA, OPEC member states had collectively lost at least US$450 billion in revenues.

By the time that the next oil price war rolled around earlier this year, instigated again by the Saudis with exactly the same strategy as the war of 2014-2016 (crude oil overproduction to crash oil prices) and exactly the same objective (to destroy or disable the U.S. shale oil sector) the U.S. was in no mood to – as one senior source close to the Presidential Administration told OilPrice.com at the time – “put up with any more crap from the Saudis.” In the run-up to the March 2020 oil price war, U.S. President Donald Trump had already repeatedly warned the Saudis that the U.S. would not accept any actions that would undermine either its economy or the continued development of its shale oil sector. At a 2018 speech before the U.N. General Assembly, he stated: “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 said, and shortly afterwards he underlined at a rally in Southaven, Mississippi, in October 2018: “I said, ‘King we’re protecting you. You might not be there for two weeks without us.’” Finally, on 2 April, after the Saudis had further destroyed the finances of its fellow OPEC members, Trump telephoned Saudi Arabia’s de facto ruler, Crown Prince Mohammed bin Salman, and directly told him that unless OPEC started cutting oil production he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the Kingdom. Related: Why Russia Is Pushing Unneeded Nuclear Power Plants On Egypt

Worse, though, is on the horizon for Saudi Arabia and OPEC. The U.S. has been so enraged by the Saudis trying to destroy its geopolitically and economically crucial shale oil sector yet again that any further moves by Saudi and OPEC to either push prices up over the US$80 per barrel of Brent level (regarded as economically harmful to the U.S.) or to below US$40 per barrel of Brent (seen as damaging for the U.S. shale oil sector) is highly likely to result in the passing of the ‘No Oil Producing and Exporting Cartels Bill’ (NOPEC). A version of the NOPEC bill managed to pass both houses of Congress in 2007 before it was shelved after President George W. Bush said he would veto the legislation. However, in February 2019, the U.S. 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. It was only the intervention of Trump at that time that stopped the Bill being voted into law.

This Bill makes it illegal to artificially cap oil (and gas) production or to set prices, which is a corollary function of OPEC, and it removes the sovereign immunity that presently exists 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 its estimated US$1 trillion of investments in the U.S. alone, and to all other OPEC member facing the same legal action. It would also mean the end of OPEC in any meaningful form.

By Simon Watkins for Oilprice.com


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