For Saudi Arabia, the current oil crisis is not an abstract issue. It is the result of years of growing discontent over Washington’s assertive policy to reduce its dependency on Saudi oil following King Faisal’s unilateral oil embargo in 1973 that plunged the world into a recession.
Over the past four decades, the US has sought to stock as much oil reserves as possible, seeking to insulate itself from any potential repeat of 1973. The assassination of King Faisal in 1975 ended Saudi antagonism to US policy in the region, and Riyadh turned a blind eye to Washington’s attempts at reducing dependency on the basis that while the US was stocking oil reserves, it was not producing enough capacity to threaten Saudi Arabia.
For Saudi Arabia, oil has served as a personal check and balance on an increasingly aggressive US.
For Saudi Arabia, oil has served as a personal check and balance on an increasingly aggressive US that has: launched Operation Desert Storm in 1990 before exhausting all options for dialogue; established the largest military base in the region in Qatar—a display of favor for a regional antagonist; launched an invasion of Iraq and Afghanistan in 2003; engaged in a military intervention in Libya; expanded its military bases in the Middle East; exerted significant pressure on Palestinians; engaged in attempts at rapprochement with Iran under Obama at the expense of Gulf security; and expressed indifference at the fall of long-term allies. Saudi Arabia’s view is that its ability to wield oil in a manner that can strong arm Washington is what prevents it from being targeted by the US administration in a similar manner to Iraq.
However, the advent of shale oil upended the dynamics entirely. Despite the high costs of production, Washington encouraged the industry by providing exceptionally lenient financing and regulations in a bid to temper production costs and boost the ability of US companies to compete in global markets. Once shale oil began to enter the market, prices began to drop, bringing about deep economic concern among OPEC countries reeling from the impact of the financial crash in 2008 and needing relatively high oil prices to balance budgets and finance diversification projects.
Still, Saudi Arabia was unwilling to challenge Washington amidst an ensuing domestic succession struggle that escalated as King Abdullah’s health deteriorated, and a climate that saw the Arab Spring in full flow. NATO had stormed into Libya to oust Gaddafi, long-term US ally Mubarak had fallen in Egypt, France ally Ben Ali had fallen in Tunisia, Ali Abdullah Saleh had fallen in Yemen, and Syria was entering its first stages of what would become a brutal civil war. Saudi Arabia could not afford to bring prices lower as it set about raising public sector salaries and other measures to insulate itself from the wave of uprisings.
To contain the impact of falling oil prices, Saudi Arabia and the OPEC countries cut production to shore up prices.
To contain the impact of falling oil prices brought about by the discovery and production of shale, Saudi Arabia and the OPEC countries cut production to shore up prices. However, this encouraged the US to pump more oil, bringing the prices down again, and also allowing the US to seize the market share vacated by OPEC.
OPEC became increasingly disgruntled with aggressive US tactics in seizing market share. At the same time, Riyadh found respite from the Arab Spring following a renewed protest movement in Egypt that culminated in Sisi’s military coup, and the success of the GCC-brokered National Dialogue in Yemen that saw the establishing of a new government under Hadi. Saudi Arabia then decided to launch an offensive on US shale in 2014, increasing production and driving prices even lower in a bid to force shale oil companies into bankruptcy. However, shale oil companies demonstrated resilience and many of the smaller companies that buckled under the pressure were swept up by larger entities, resulting in a “streamlining” of the industry.
Saudi Arabia soon relented on the offensive as King Abdullah passed away and the domestic succession struggle intensified with two Crown Princes deposed in three years. There was much lobbying in Washington for favor as Al Saud wrangled over how to pass on the kingship from the generation of the founding King Abdul Aziz’s sons to the generation of his grandsons. The “victor,” Mohammed Bin Salman (MbS), wary of his precarious position and the presence of potentially potent opposition figures such as former Crown Prince Mohamed Bin Nayef – who had once enjoyed the public backing of US officials – avoided antagonizing Trump. MbS preferred to encourage production cuts than exacerbate OPEC tensions with Washington. Even as Russia sought out OPEC and formed an alliance in what is now known as OPEC+, Bin Salman resisted pressure from Moscow to take active steps to pressure US oil producers.
Mohammed Bin Salman preferred to encourage production cuts than exacerbate OPEC tensions with Washington.
In 2020, a series of events took place that destroyed the fragile peace in the oil markets. On February 18, the US imposed sanctions on subsidiaries of Russian oil company Rosneft. On February 20, US Secretary of State Mike Pompeo visited Belarus in the first visit by a senior US official of his standing in more than 20 years and announced at a press conference in Minsk that the US would appoint an ambassador after a 10-year hiatus, and was ready to supply all of Belarus’ oil needs. This was a direct challenge to Moscow which currently supplies Belarus and has seen talks with Minsk over a renewal of oil supply for the year break down. The following month, Crown Prince Mohammed Bin Salman arrested his most high-profile rivals—Prince Mohamed Bin Nayef and Prince Ahmed Bin AbdelAziz, ending the last viable possibility of a challenge to his authority.
As OPEC mulled production cuts in anticipation of a fall in demand due to the COVID-19 pandemic, a furious Moscow called on OPEC to take action against shale. Riyadh resisted and insisted Moscow abide by proposed production cuts. Putin refused believing such measures were more an appeasement by Riyadh to Washington. At this point, relations broke down entirely and Russia proceeded to flood the market with oil in a bid to protect its market share from the US.
Saudi Arabia found itself in a conundrum; either it went ahead with OPEC production cuts and cede more market share to the US and Russia, or launch a war of attrition to force both Moscow and Washington to reconsider their approaches and come to the table. Riyadh chose the latter and flooded the market, plunging oil prices to even lower levels, and finding a justifiable excuse to Washington that Russia was the prime instigator.
Trump offered Russia and Saudi Arabia a commitment by the US not to take advantage of OPEC cuts to seize market share.
Trump, who had hoped to ride out the pressure, was swiftly informed by US oil companies that they could not handle the pressure this time and that he should make a deal. Trump offered Russia and Saudi Arabia exactly what they were hoping for: a commitment by the US not to take advantage of OPEC cuts to seize market share, and also to contribute to the burden of cutting production by reducing its own.
The extent of Trump’s desire for a deal was evident in his promise to take on Mexico’s added cuts if it meant President Obrador would stop holding up the deal. It was also apparent in Trump’s workaround of US anti-trust laws, while claiming US production would be cut not by executive order but inadvertently as a result of market conditions.
Yet none of these powers could anticipate the extent of the devastating impact COVID-19 would have on the market. OPEC producers have control over the production side of the market. However, they are powerless in tackling plummeting demand levels as the virus shows no sign of relenting and governments struggle to balance containment with economic damage limitation.
In short, the crux of the issue is not that Saudi Arabia mishandled the market. It is that the festering discontent among OPEC countries and Russia over Washington’s aggressive bid to become an influencer in the market exploded in a series of unfortunate events that as a result of COVID-19 seem irreversible for at least the next few months.
Saudi Arabia is not content to bear the burden of oil cuts so that Washington can capitalize as it has done in the past.
Meanwhile, Saudi Arabia is not content to bear the burden of oil cuts so that Washington can capitalize as it has done in the past. For Riyadh, oil is more than just a commodity; it is the last line of defence in a relationship that is already far too imbalanced.