About the author: Jim Krane is the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute in Houston, Texas. He is the author of the 2019 book Energy Kingdoms: Oil and Political Survival in the Persian Gulf.
Saudi Arabia, long a U.S. partner in oil markets, is now prioritizing cooperation with Russia and increasingly parting ways with the United States.
The Organization of Petroleum Exporting Countries decided this week to cut oil production by two million barrels a day. Saudi Arabia, the largest producer within the cartel, backed the decision. By forcing up oil prices, OPEC is giving an assist to Moscow’s foundering invasion of Ukraine and easing Russia’s increasing isolation.
This is a major change for a kingdom that has been a solid member of the U.S. camp since the 1940s.
Where once Saudi Arabia and Russia had been vehement Cold War foes, cooperation is the order of the day. And where Saudi-led OPEC had been a force for stability in oil markets, the cartel now looks reckless, pushing prices up amid virulent global inflation.
OPEC has always had so-called price hawks like Iran and Venezuela among its membership. They perpetually push for production cuts that would raise prices. Now, the price hawks are in control.
The extraordinary Russia-Saudi oil-market cooperation has survived Covid, a short-lived price war in early 2020, Russia’s invasion of Ukraine in February, and now, President Vladimir Putin’s threats of nuclear warfare.
Saudi and Russian oil ministers were unhappy with oil prices relaxing toward $80 per barrel, after recent highs of $130 in March. They decided a forceful response was in order.
Officially, the production cut by OPEC+, which includes Russia and other non-OPEC members, is a big one—2 million barrels per day. But the actual volumes taken off the market will be about half that, because some countries were unable to meet their allotted quotas.
The timing could not be worse.
Central banks the world over are in fire-fighting mode, trying to prevent decades-high inflation from spreading into new sectors. Oil supplies were already tight amid low investment. Saudi Aramco’s CEO, Amin Nasser, said this week that global oil inventories were “extremely low.”
If OPEC were intent on market stability, part of its mission statement, it would be holding production steady, at minimum. Nasser rationalized the disruptive production cuts by saying the kingdom needs more spare capacity as dry powder in case oil demand surges again.
For the rest of us, dependent on oil for more than 90% of our transport needs, higher oil prices will quickly bleed into prices of everything else.
By contrast, it’s happy days for those on the receiving end of that unnecessary extra spending. Saudi Aramco was reeling in around $1 billion per day in the spring. Prices may not get that wild, but the recurring specter of $5 per gallon U.S. gasoline must have President Biden questioning the wisdom of ostracizing Saudi Crown Prince Mohammed bin Salman and squandering his influence over Saudi oil-market strategy.
The question now is whether Saudi Arabia’s tilt toward Russia will hold over the longer term, or whether it is a temporary response to mutual Saudi-Russian disdain for the Biden administration.
Biden is certainly iced out. Earlier this year, the Biden administration found itself unable to persuade the day-to-day leaders of Saudi Arabia and the United Arab Emirates to take Biden’s phone calls seeking help with high-flying gasoline prices.
The snub appeared deliberate. Saudi Crown Prince Mohammed bin Salman and UAE Crown Prince Mohammed bin Zayed had no trouble clearing their schedules to receive calls from President Putin.
Biden’s pride-swallowing July trip to the kingdom—where he fist-bumped bin Salman—appears to have achieved nothing. Biden’s options were reduced to tapping U.S. emergency stocks.
The brazenness of Saudi Arabia’s diplomatic slaps jolted Washington. After all, the U.S. spends $100 billion per year to fund hard security provision in the region.
Saudi Arabia was mostly a force for diplomatic caution and oil-market stability under the reigns of a succession of monarchs leading up to the 2015 accession of King Salman. Today’s sad state of U.S.-Saudi relations was unthinkable.
In the wake of the 2018 murder of Washington Post columnist Jamal Khashoggi Biden described the kingdom as a “pariah” state in his election campaign. Until U.S. gasoline prices began to climb, Biden made no attempt to hide his personal disdain for Saudi Arabia.
But tight oil markets increased the kingdom’s diplomatic leverage. Biden’s cold treatment engendered a response in kind from the Saudi prince.
At the end of the day, there is little the U.S. government can do about short-term oil prices. Even the fact that the shale boom has left us self-sufficient doesn’t protect us—or Biden—from higher prices at the pump. The Saudis are not helping matters, but Biden’s freedom of action is being most egregiously curtailed by American consumers. Our preferences for big and inefficient vehicles over-exposes us to market manipulation by oil producers. If more Americans drove Priuses or EVs than F-150s, these sorts of diplomatic spats wouldn’t hurt as badly.
Maybe it’s time to revisit fuel efficiency while we reconsider our foreign relations.
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