The US-Saudi rivalry over the oil market

Professor Bernard Haykel
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OPEC+, the national oil producers’ cartel that is dominated by Saudi Arabia and Russia, will be meeting virtually this Sunday to decide on future production quotas. Predictions about what will be decided this weekend are all over the map. This is a period of great instability in the energy world because of the effects of Russia’s war on Ukraine, the uncertainty about Chinese demand due to Beijing’s zero-Covid lockdown policies, and the risk of a global economic recession.

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Many who have looked at oil market dynamics have focused on the tensions between President Biden and Saudi Arabia’s Crown Prince Muhammad bin Salman, and in so doing wrongly focused on the personal rather than the structural. Thus, OPEC+’s October production cut was interpreted not as a market-driven decision but instead as a poke in Biden’s eye just before the November mid-term elections. The cut was expected to lead to higher prices at the pump and hasten the rout of the Democrats at the polls. This is certainly how the Biden administration and many in Washington DC saw the matter. Calls for punishing Saudi Arabia were swift and some Democrat politicians--using imperialist language—argued that the Kingdom, as a “client state,” needed to be taught a lesson. President Biden himself promised “there will be consequences” for the Kingdom while others threatened a freeze on arms sales and the passing of the NOPEC bill that would allow for legal action against Saudi Arabia in US courts. Yet as things turned out, the October cut had no significant effect on the elections: the Democrats did relatively well, and oil prices have since October fallen on average by more than 10 percent. In effect, this proved Saudi Arabia’s claim that the cut was warranted because of an oil supply overhang and that markets had to be balanced.

In the lead up to this Sunday’s OPEC+ meeting, some observers have argued that the Saudis will not push for another cut because President Biden’s State Department recently declared Bin Salman, as a sitting head of government, immune from legal prosecution in US courts. In so doing, Biden is viewed to have given Bin Salman a pass on human rights issues, when in fact such sovereign immunity recognition is a fundamental feature of international law, and not to have granted this would have exposed US officials to prosecution overseas.

So, if the tensions are not rooted in bitter personal relations what then explains the troubled relationship between the US and Saudi over oil policy? The answer lies in how the international oil market functions and who gets to have greater say about price. Put more simply, will it be the consuming nations in the West or the Gulf producers who play the dominant role in the market? The United States under President Biden has been trying to create what one might call a buyers’ cartel whereas the oil producers, led by Saudi Arabia, are resisting such efforts and seek to preserve the dominance they have enjoyed since the early 1970s.

To accomplish this market power for consumers, the US and its western allies have pursued a three-pronged strategy. First, they have released millions of barrels of petroleum from their respective Strategic Petroleum Reserves (SPR) since last fall. This is unprecedented because it is specifically aimed at reducing the price at the pump, and not to address a supply shock, which is the original purpose of the SPR.

Second, the US with its European allies are in the final stages of creating a market mechanism for setting a price cap on Russian oil exports. This is intended to reduce Russia’s income from oil sales, and the price will be set at below market price, with severe sanctions against any violators and penalties for any company insuring the transportation of cargo. If successful, this scheme could be deployed in the future against other producing countries that are deemed enemies of the West.

Third, the Biden administration has been pressuring countries like Saudi Arabia, the UAE and Kuwait to increase production to achieve US domestic political goals. This began in late September 2021 when US National Security Advisor Jake Sullivan asked Bin Salman for more oil production. This was five months before the Russian invasion of Ukraine in February 2022, and the request was made for political reasons given rising oil prices in the US as a result of increased demand after the Covid pandemic started receding. Saudi Arabia did not accommodate Sullivan’s request because it did not wish to set the precedent of deciding its oil production—a sovereign decision--in response to domestic US considerations.

After the war started in Ukraine, US demands for increased production increased, now ostensibly to help bankrupt Russia, and this was an important reason for President Biden’s visit to the Kingdom in July 2022. He asked for more oil. Again, the Saudis responded with a mere hundred thousand extra barrels and stuck to the agreements they had made within the OPEC+ framework. Since OPEC+’s October decision false rumors have spread of a Biden-Bin Salman agreement to increase production, when in fact the Saudis promised to increase this only to stop prices from rising to very high levels, but not if the market was oversupplied.

By the fall 2022, the Saudis became deeply anxious that the Americans along with their European allies were using the war against Russia to rejig the market against OPEC+. In addition to the price cap system on Russian oil, American officials began talking about establishing a price floor on oil. For example, Amos Hochstein, the US Special Envoy and Coordinator for International Energy Affairs and head of the Bureau of Energy Resources at the U.S. Department of State, pleaded with the Gulf producers not to cut production before OPEC+’s October meeting. His inducement for not doing so would be for the US to buy 200 million barrels at $75/b to replenish the SPR. In effect, he was telling them that the US would be setting the price. They balked and decided to cut by two million barrels, although the actual physical decrease was closer to 900k barrels of daily production.

Where do things now stand given these conflicting goals and the tussle for market control? It is difficult to predict oil market dynamics because there are many unknown variables such as how much will Russia be able to produce and sell or will Chinese demand fall or increase or will US shale production soon recover its high levels. From the Saudi perspective, however, the Kingdom is undertaking a colossal economic diversification plan, called Vision 2030, and this along with Saudi Arabia’s fixed fiscal obligations require a barrel price above $80 and preferably closer to $100. The Saudis will not produce more to help US political parties win elections nor to support Russia’s militarily defeat. This is because increased production, and thus lower prices, could imperil achieving their domestic goals. Their decision making is based on maintaining their revenue, which is central to their survival. The crux of the matter is national interest and sovereignty, and the present US administration appears to fail to understand these imperatives. What all this means for Sunday’s meeting is that the Saudis will push for a market-driven collective decision and try to keep overseas politics at bay.

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