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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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Is This The Beginning Of A Reconciliation Between The U.S. And Saudi Arabia?

  • The 20-year agreement for NextDecade Corporation to sell U.S. liquefied natural gas might have greater implications than many analysts anticipate.

  • There are a number of reasons why Saudi Arabia is looking to improve relations with the U.S.
  • That the U.S. is willing to engage with Saudi Arabia on a long-term contract in this vital energy sector may signal that the dramatic deterioration between the two countries seen from the 2014-2016 Oil Price War might be set to reverse.
US Saudi flags

The signing of a 20-year deal for the U.S.’s NextDecade Corporation to sell liquefied natural gas (LNG) to Saudi Arabia’s flagship company, Aramco, could have a significance way beyond the confines of the energy market. Following Russia’s invasion of Ukraine on 24 February 2022, LNG is now the key strategic energy source in an increasingly dangerous world, as analysed in full in my new book on the new global oil market order. Unlike oil or gas that is transported through pipelines, LNG does not require years and vast expense to build a complex infrastructure before it is ready to transport anywhere. LNG can be shipped and moved anywhere within a matter of days and bought reliably either through short- or long-term contracts or immediately in the spot market. Consequently, it now has a massive geopolitical importance as well, which is only set to increase as global demand for it is estimated to rise by more than 50 percent by 2040, according to energy industry forecasts. That the U.S. is willing to engage with Saudi Arabia on a long-term contract in this vital energy sector may signal that the dramatic deterioration between the two countries seen from the 2014-2016 Oil Price War might be set to reverse.

Related: US West Coast Refiners Swap Expensive Iraqi Crude for Cheap Canadian Oil

Prior to the onset of the 2014-2016 Oil Price War, Saudi Arabia had been the most powerful oil nation in the world, not only by dint of its own sizeable oil reserves and average production of just over 8 million barrels per day (bpd) but also because of its de facto leadership of OPEC. At that point, OPEC 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. The power of Saudi Arabia and OPEC had been evidenced in the 1973/74 Oil Crisis (which can be seen as the First Oil Price War), as also fully analysed in my new book, which saw a widescale oil embargo push oil prices from around US$3 per barrel (pb) to nearly US$11 pb and then trending higher again. This, in turn, stoked the fire of a global economic slowdown, especially felt in the West. The then-Saudi Minister of Oil and Mineral Reserves, Sheikh Ahmed Zaki Yamani, who was widely credited with formulating OPEC’s strategy, highlighted that the extremely negative effects on the global economy of the oil embargo marked a fundamental shift in the world balance of power between the developing nations that produced oil and the developed industrial nations that consumed it. This had also been noted in the U.S., particularly by Henry Kissinger, who served as National Security Advisor from January 1969 to November 1975 and as Secretary of State from September 1973 to January 1977. At that point in the 1970s, the U.S. lacked the crude oil production capability that made its economy immune from the damaging effects of such future oil embargoes by Saudi Arabia, OPEC and the other big oil-producing countries. However, Washington determined that it would make every effort to find such resources, and it struck the jackpot with the full-throttle development of the country’s shale gas and oil resources from 2010/11.

In the interim period from 1974 to 2011, relations between the U.S. and Saudi Arabia and OPEC had been cordial enough, based as they were on the foundation stone agreement struck on 14 February 1945 between the then-U.S. President, Franklin D Roosevelt, and the then-Saudi Arabian King, Abdulaziz bin Abdul Rahman Al Saud, as also detailed in the book. This deal was simply that the U.S. would receive all the oil supplies it needed for as long as Saudi Arabia had oil in place and, in return for this, the U.S. would guarantee the security both of Saudi Arabia and its ruling House of Saud. However, as the U.S. began to scale up its shale oil production in the early 2010s, it became obvious to Saudi Arabia that this would pose a huge threat not just to its economic prospects in the years ahead as its global oil market share was reduced by U.S. shale, but also to its political standing in the world, as this was primarily based on its oil power. Consequently, it saw no choice by 2014 but to launch an all-out price war designed to severely damage the threat from the U.S. shale sector. Due to the unexpected ability of these shale producers to dramatically decrease their shale production costs, as fully examined in my new book, the massive fall in oil price caused by concerted overproduction from Saudi Arabia and OPEC only made the U.S. shale sector leaner, meaner, and even more of a threat. The only real damage was done to those who launched the Oil Price War, with both Saudi Arabia and OPEC seeing their economies decimated and their reputation in the oil market seriously damaged as well.

It was at that point in late 2016 that Saudi Arabia and OPEC needed to engineer a major increase in oil prices so that they could begin to repair their economies, and to do so they needed a major oil producing ally who was still taken seriously by the oil markets. Russia stepped forward to support the intended oil production cuts that were aimed at pushing prices up, and ‘OPEC+’ came into being. This alienated the U.S. further, which had already seen the 1973/74 Oil Crisis and the 2014-2016 Oil Price War as fundamental breaches of the 1945 relationship foundation agreement between itself and Saudi Arabia. Given the increasing froideur in Washington, Riyadh moved to expand relations with key Russian ally, China, which had already shown its willingness to support Saudi Arabia economically during the 2014-2016 period with an offer made to buy a sizeable chunk of Aramco in a private placement, among other assistance proffered. The rapid broadening and deepening in scope and scale of these two relationships by Saudi Arabia can be seen in the extraordinary relationship resumption agreement struck by it with its historical nemesis Iran on 10 March 2023, brokered by China, as also analysed in full in my new book on the new global oil market order. On the other side of the equation, so bad had Saudi Arabia’s relationship with the U.S. become that the Kingdom refused even to take a telephone call from President Joe Biden in 2022 when he called to seek help to bring oil prices down after the Russian invasion of Ukraine.

There are five key factors that appear to be behind the rapprochement with the U.S. from the Saudi Arabian side. First, that Russia’s invasion of Ukraine is still going on – having originally been pitched in the Kremlin as likely to last around three days at most – has underlined Moscow’s conventional military frailty, and this is of no use to Saudi Arabia facing a re-energised Iran. Second, it is clear that Russia’s economy is set for ongoing contraction as the U.S. and its allies in the West and East continue to tighten the sanctions’ noose around it – again, this is of no help to the financially-struggling Riyadh. Third, China’s economy also remains fragile after its Covid years, underlined by President Xi Jinping team’s request during his last visit to the White House to swap U.S. Treasury bills and their Chinese renminbi equivalents in the amount of US$770 billion. Fourth, Russia and China appear far more interested in developing their interests in Shia Iran and Iraq than in Sunni Saudi Arabia, partly because of the bigger combined oil and gas reserves there and partly because there is less objection to Russian and Chinese oil and gas field ‘security personnel’ being on the ground in those two countries. Iran and Iraq are also at the centre of the Shia Crescent of Power, as analysed in my book, which gives Russia and China a greater presence across the Middle East as a whole. And fifth, in both the Russia-Ukraine War and the Israel-Hamas one, the U.S. and its key allies have consistently shown their ability to take control of proceedings by leveraging the broad spectrum of economic, political and military advantages available to them. From the U.S.’s perspective, an onside Saudi Arabia would act as a powerful counterbalance to the growing power of China and Iran in the region. It might also afford Washington some influence in Saudi Arabia’s decisions regarding OPEC production.

By Simon Watkins for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on June 25 2024 said:
    This could be a wishful thinking or the author is reading too much into a 20-year agreement to supply US LNG to Saudi Arabia. Qatar does it all the time with China and now with the EU and many others. So it is no big deal.

    However, of recent times Saudi Arabia with a $1.0 trillion economy based on purchasing power parity (PPP) has been charting a new foreign policy and establishing new strategic alliances with both China and Russia. While its relations with the United States will on the whole continue to be tepid, they will never be intimate again. There are reasons for this dramatic change.

    1- Saudi Arabia is aware of the shift in the World Order from a unipolar system led by the United States to a fairer and more equitable multipolar one being ushered in by China and Russia and supported by the BRICS along with a new global financial system away from the dollar.. That is why Saudi Arabia joined BRICS.

    2- The Saudis are equally aware of the growing global lack of confidence in the US dollar as evidenced by Central banks reducing their dollar holdings and buying more gold instead and the accelerating de-dollarization drive. That is why Saudi Arabia has decided not to limit sale of its oil to the petrodollar and accept the petro-yuan as payment for its exports to China.

    3- With China emerging as the new 'indispensable superpower' and being the world's largest economy since 2013 based on PPP, Saudi Arabia has started to rearrange its strategic alliances establishing closer ties with both China and Russia. After all, the Saudis sell 80% of their oil in China and the Asia-Pacific and China is their main investment destination while its cooperation with Russia in oil matters has become the cornerstone of OPEC+'s policies.

    4- Saudi Arabia has finally come to the conclusion that China works for peace in the Gulf region as evidenced by its brokering the resumption of diplomatic relations between the two arch-enemies Saudi Arabia and Iran while the United States' policy has always been based on fostering trouble and conflict and playing Iran and Saudi Arabia against each other from the days of the Shah to sell weapons to the Saudis.

    5- The turning point came in June 2019 when the Houthis of Yemen attacked the Saudi pumping station of Abquiq putting 50% of Saudi production out of action . The United States accused Iran of being behind the attack but took no retaliatory action against it or the Houthis. It never came to the defence of Saudi Arabia.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • George Doolittle on June 25 2024 said:
    If this is what the KSA wants so much the better and if not hopefully we can still work with that too.

Leave a comment

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