Although Saudi-led OPEC and Russia have agreed to extend existing record oil output cuts reached in early April when leaders of Saudi Arabia (KSA), Russia, and the US eventually agreed to cut the output by a record 9.7 million barrels per day – or 10 percent of global output — the cuts proved too little, too late, as global consumption fell further.
The US shale producers have been badly hit by the Saudi-Russian oil price war, which has coincided with the Covid-19 crisis, sending oil prices plummeting while pushing the global economy into recession.
In the United States, the oil price war has greatly angered some of the most influential Republican lawmakers from oil-producing states, which are essential for the re-election of Donald Trump. The volatility and oil price crash have led to layoffs in the industry and many accused Saudi Arabia of betraying its more than 70-year-old special relationship with the US, calling on the US administration to punish the Saudis.
Given that Saudi Arabia has lost much of its credits in both legislative houses, some even urged President Trump to sign the No Oil Producing and Exporting Cartels Act (NOPEC) in case Saudi Arabia recidivates. The NOPEC Bill would make it illegal to artificially cap oil (and gas) production or to set prices, and would also immediately remove the sovereign immunity that presently exists in US courts for OPEC as a group and for each and every one of its individual member states.
The current oil cut production deal has calmed irate senators and there is no indication that the US would increase the pressure on Saudi Arabia.
However, it seems that the current oil cut production deal has calmed irate senators and there is no indication that the US would increase the pressure on KSA.
Speaking to Inside Arabia, Anand Toprani, an associate professor of strategy, energy, geopolitics, and political economy at Newport-based US Navy War College, said that the NOPEC Bill “would be a serious matter if it ever passed, but there is no evidence that the current administration considers it to be anything more than leverage against Saudi Arabia – that is to say, a stick to threaten Riyadh, but not one Washington would seriously consider using.“
Moreover, the current deal, has not just stabilized the oil markets but will also provide some additional breathing room for US shale and a return to profitability for the oil-gas sector companies as a whole, explained Dr. Cyril Widdershoven, a global energy market expert and founder of Dutch consultancy Verocy. Widdershoven noted that with WTI/Brent hovering above $30 USD per barrel, there is again some room for a revamp of US shale, while US oil giants are being kept afloat.
As the US administration is reportedly considering another round of weapons sales to Saudi Arabia (despite Congressional concerns), Oliver John, founder and President of Astrolabe Global Strategy, thinks that the likelihood of the administration supporting near-term punitive measures is probably low.
Nevertheless, despite how Trump’s pressure on Mohammed bin Salman (MbS) has contributed to his decision to reach the oil-cut deal, “this is not the first nor the last oil price war we will witness,” according to Dr. Bader Al-Saif, from Carnegie Middle East Center.
“The US doesn’t really have any leverage against Saudi Arabia to halt a price war,” said Toprani. He warned that if the United States passed NOPEC, Saudi Arabia would most likely start all-out production to drive high-cost sources out of business — it would be a battle to the death since the very future of the Saudi state would be at stake. Therefore, if Saudi Arabia felt that OPEC was in danger and the circumstances permitted it, there is no reason to think it would avoid another price war.
The OPEC+ and Saudi oil power position has strengthened, as in any low oil price scenarios, Arab producers would be winners due to low production costs and high demand for their crude qualities.
In Widdershoven’s opinion, the OPEC+ and Saudi oil power position has strengthened, as in any low oil price scenarios, Arab producers would be winners due to low oil production costs and high demand for their crude qualities. Conversely, the US shale oil and gas exports were hurt by a lack of domestic demand because of the lower quality of US shale. Even globally, shale oil is not very desirable since it is not used to manufacture essential goods. Hence, the market share of OPEC and Saudi Arabia is growing, and will continue growing, even if total volumes demand is under pressure.
However, the possibility of losing US military protection in a time of high tension with Iran is a card that the White House may use when dealing with Riyadh. The decision to withdraw two Patriot missile batteries guarding Saudi Arabian oil facilities in the beginning of May, has raised many questions regarding the current state of US-Saudi relations.
According to John, President Trump wanted to send a clear signal to Riyadh as a consequence of the oil price war, although the redeployment would have happened sooner or later. Widdershoven noted that Saudi Arabia still has more than enough air-defense capabilities and the two US Patriot batteries do not make much difference, given the current systems deployed are not really efficient against drone attacks.
According to Al-Saif, the oil price crisis will not redefine US-Saudi relations. “A change in the administration in November may reposition certain parameters of that relationship but not radically shift it either way,” he told Inside Arabia.
In fact, both countries are “even more linked than ever before as Saudi investments in the US are increasing, while US companies are vying for new projects in KSA,” said Widdershoven, noting that with the COVID-19 economic crisis there is pressure on US companies and lobbyists to keep the door to Riyadh open.
But according to John, members of Congress in both parties are still concerned about the Khashoggi murder, continuing human rights abuses, and potential misuse of US weaponry against civilians in Yemen. So, if Joe Biden wins in November, he has publicly committed to ending US support for the Saudi war in Yemen. He believes the relationship will continue, even if it does change.
The key factor will be the US position towards Iran, according to Toprani. While the Obama administration sought to create a modus vivendi with Tehran, which enraged Riyadh, the current US administration restored relations with KSA. This despite Trump’s past complaints about Saudi determination to maintain a hard line against Iran, which depends on Saudi and Israeli assistance.
The US administration is reportedly interested in closer cooperation with Saudi Arabia and Russia, including their oil deal, in order to contain China.
Last but not least, the crisis also offers an opportunity for both countries to collaborate on stabilizing oil prices, while improving both security and mutual relations. The US administration is reportedly interested in closer cooperation with Saudi Arabia and Russia, including their oil deal, in order to contain China.
However, Toprani said that both Russia and the Gulf states will take advantage of the benefits of a closer relationship with China—the Gulf states (both Arab and Iran) certainly welcome closer economic ties to China, which is also their primary customer for oil. Since the US does not need that oil, the Arabs and Iranians must sell it somewhere, which means they will not pursue an overtly hostile relationship with China.
As for Widdershoven, he believes closer US-Saudi cooperation is possible, and maybe even necessary, adding that he would not be surprised if Democrats, in the case of Biden’s victory, would take a similar approach. “China’s power build-up, OBOR[i], and most clearly the negative impact on global trade by COVID-19, is not going to be taken lightly. US-NATO and Russia have in this the same potential enemy.”
It is also worth noting that the young Crown Prince MbS will sooner or later inherit the Saudi throne and will very likely rule the Kingdom for the next several decades, so it would be unwise for the US to push him aside instead of collaborating with him on the matters that are beneficial for both sides.
[i] The Belt and Road Initiative (BRI, or B&R), formerly known as One Belt One Road (OBOR) is a global Chinese development strategy involving nearly 70 countries.