After the roil in global oil markets between 2015 and 2017 sent oil prices tumbling from more than $100 per barrel in mid-2014 to below the $30 per barrel mark by January 2016, many analysts and journalists, including myself, believed that it was the end of Saudi oil market dominance.
Just a look at oil output figures over the past few months justified this type of thinking, with U.S. oil production soaring as the U.S. bypassed Saudi Arabia to become the second largest oil producer on earth.
Even the International Energy Agency (IEA) joined the chorus of analysts highlighting Saudi Arabia’s struggles. Over the next three years, the U.S. will make up 80 percent of the world’s oil demand growth, the Paris-based agency said in its Oil 2018 annual report in March. Canada, Brazil and Norway will cover the remainder, leaving no room for other nations.
“The United States is set to put its stamp on global oil markets for the next five years,” said Dr. Fatih Birol, the IEA’s Executive Director.
Saudi Arabia makes a come-back
Now, however, its time to question the narrative of Saudi Arabia throwing in the towel on the global oil war. Sure, the Kingdom is still running massive budget deficits incurred from the 2015 to 2017 period, but those deficits are shrinking.
Moreover, the Saudis, if by nothing but sheer willpower, are turning global oil markets back in their favor. It’s different this time, however, because the world’s largest oil exporter had to make a geopolitical pivot in order to make it happen, reaching out to Russia and other non-OPEC producers to reign in production and soak up supply overhang, bringing OECD oil inventory levels to five-year averages. Related: Is The Oil Market Ready For Sanctions On Iran?
The interesting part of the IEA projection mentioned above is that U.S. shale oil production increases are due to higher oil prices, but at what point do these higher oil prices stymie demand and become counterproductive? This is a lesson that the Saudis seem to not have yet learned, in spite of the aftermath of the 1973 oil embargo.
Not unsurprisingly, the Saudis want even more; they want their oil market dominance back. As far back as February, Saudi Arabia began talking with its new oil partner Russia about a new metric to measure global oil inventory levels. Meanwhile, the OPEC/non-OPEC oil alliance is gaining strength and the two former belligerents are considering a ten or even 20 year oil production alliance.
Fundamental change in global oil markets
The possibility that a Saudi led OPEC and Russia coalition will commit to a decade or even two-decade strategy to control oil production would mark the most significant fundamental shift in global oil markets since the U.S. shale oil boom caught the world by surprise nearly ten years ago.
In effect, a strengthened OPEC-Russian alliance will allow the Saudis to do what they've wanted to do all along but could not do without outside help – challenge U.S. shale oil production’s impact on oil markets, secure again the role of global swing producer, and most significantly, refill Saudi coffers.
If there is an element of indulgence in this strategy, it wasn’t lost on President Trump who took OPEC to task last week. In a much criticized tweet, the President said that it “looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!”
Of course, the president is also playing to his political base at home since higher oil prices not only threaten the impact of his recent tax breaks, but also force American consumers to pay more at the pump for gasoline. If the average American usually votes with their pocket books and with Trump’s base being working class Americans that will be hit hardest from higher gas prices, Trump’s tweet can be justified, even though it was worded as if he had a dismal understanding of global oil markets.
At first blush, it seems there isn’t much Trump can do other than use the presidential bully pulpit to chastise OPEC producers. However, one should not write off this fire brand president, and tough talking former New York real estate mogul. With American energy independence as one of the top campaign themes from the 2016 election, Trump might get creative in his defense of the U.S. economy and domestic energy production.
Taking a look back at the 2016 election could provide some clues of how Trump could respond if the Saudis and OPEC do indeed drive up oil prices to the $80-$100 price point, which they indicated was a favorable price range last week.
Tough talking Trump
Trump had been particularly hard on Saudi Arabia and other Arab oil producers during the 2016 campaign, calling for an end to Saudi and Middle Eastern oil imports. "Without us, Saudi Arabia wouldn't exist for very long," he told The New York Times in a March interview that year. "We needed oil desperately years ago," Trump said in the same March interview. "Today, because of new technologies...there's a tremendous glut on the market."
The then-presidential contender said the U.S. should be reimbursed by the countries it provided protection for, even those with vast resources such as Saudi Arabia. “We’re not being reimbursed for the kind of tremendous service that we’re performing by protecting various countries. Saudi Arabia is one of them,” he added.
Later, in a major energy speech Trump said that he would bring about "complete American energy independence" from "our foes and the oil cartels."
Then, shortly after being elected, Trump exchanged a war of words with Saudi oil minister Khalid Al-Falih. In a November 16 interview, Al-Falih took aim at Trump. “At his heart President-elect Trump will see the benefits [of Saudi oil imports] and I think the oil industry will also be advising him accordingly that blocking trade in any product is not healthy,” he said at the time. Related: Renewables Are Booming In Oil Country
“The U.S. is sort of the flag-bearer for capitalism and free markets,” Al-Falih added. “The U.S. continues to be a very important part of a global industry that is interconnected, that is dealing with a fungible commodity which is crude oil. So having equalization through free trade is very healthy for oil.”
All of this had been forgotten by the time Trump made a state visit to Saudi Arabia in 2017 and last month as Saudi Crown Prince Mohammad Bin Salman charmed his way across the U.S., pledging billions of dollars in a multitude of business deals scattered across several sectors.
Now, with Trump’s political base threatened by higher global oil prices and well as the U.S. economy in the crosshairs, it remains to be seen what the President could try to do. However, given his recent history of not only talking tough but acting to back up that rhetoric (including intervention in Syria, and tariffs against Chinese imports) - both time, as well as global oil prices, will tell if Trump would try to make good on his campaign pledges aimed at Saudi and Middle Eastern oil.
By Tim Daiss for Oilprice.com
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This begs the question as to what could President Trump do against Saudi oil. The unvarnished truth is that he could do nothing short of occupying Saudi Arabia oilfields to stop Saudi oil production and exports.
What could be irritating President Trump against OPEC and Saudi Arabia is that surging oil prices will make US oil imports estimated at 7-8 million barrels a day (mbd) costlier. Another reason is Saudi Arabia’s geopolitical pivot towards Russia. Saudi Arabia and Russia are planning long-term cooperation to ensure the stability of the global oil market and to prevent a recurrence of the glut that bedevilled their economies and the economies of OPEC members during the period 2014-2016. Such a cooperation is an anathema to the United States.
Moreover, Saudi Arabia has been reducing its oil exports to the United States partly to export more to the Asia-Pacific region and partly to prevent them being added to US crude oil inventories and then used to depress global oil prices.
I suspect that an attack by President Trump against Saudi oil could also be a warning to Saudi Arabia not to start accepting the petro-yuan instead of the petrodollar for payment for its oil exports to China and countries of the Asia-Pacific region.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Case-in-point: July 2008 when oil was nearly $150/bbl (an all-time high, even adjusted for inflation) then President George W. Bush saw to it that the margin requirements for trading crude oil contracts (in the futures market, specifically the New York Mercantile Exchange) were raised considerably. I should know--as I had already been trading commodities for over 8 years but had started trading WTI for the first time and a contract then was over $10K. This would discourage the number of contracts trading on behalf of hedge fund managers via algorithms as well as prevent novice speculators with smaller accounts from trading in the first place.
People also forget: Brazil, Norway, and Canada...not to mention how many existing members of OPEC who are all willing to cheat or altogether exit the production cut deal once oil reaches $80/bbl or higher. Then comes EVs, sales of smaller vehicles (just as the slew of Fiats & Smart Cars entered the market along with Mini-Coopers; like them or not they all entered the highways since July 2008). Next, countries such as China and India will severely abandon vehicles in place of mass transit (e.g., high speed rail, bicycles, etc.) and everything from grocery stores promoting reusable bags vs. plastic will all cause oil to fall.