About the author: Karen E Young Senior fellow at Columbia University’s Center for Global Energy Policy.
It seems that US-Saudi relations are in a race to the bottom. Both countries are now directly involved in each other’s domestic politics, which has not been the case in most of the 80-year bilateral relationship.
On October 5th, OPEC announced that it would do so Group oil production parts By two million barrels per day. Saudi Arabia led the announcement, but it included unofficial members of OPEC+ at the table, most notably Russia. Last week, the Biden administration accused the Saudi government of siding with Russia. The repercussions continue to disturb global energy policies and markets.
The Saudi government He says the Biden administration has tried to persuade the Saudi leadership to postpone any production cuts and OPEC+ announcements until after the midterm elections. (The White House claims the request was less time-bound and was waiting for markets to settle.) Oil policy is central to both Saudi domestic financial decisions and the most important foreign policy issue. The OPEC+ decision was supposed to be collectively unanimous within its alliance, but markets expected a cut of about half. It is not clear whether the decision to announce the larger cut was hasty or politically motivated by the Saudi political leadership (not technical advice). The general perception is that the Saudi leadership would have preferred the former White House man anyway.
But the accusation that Saudi Arabia has weaponized oil to help Russian President Vladimir Putin is extreme. Saudi Arabia, the United Arab Emirates and all OPEC countries are in business with Russia. Russia is a weak criminal state and a smart trading partner. The Saudi leadership may assume that keeping Putin in the OPEC+ tent is more valuable than trying to influence oil markets without him. The White House, and members of Congress, including Senate Foreign Relations Committee Chairman Bob Menendez, draw a line in the sand where Putin is one end, but the other side is the United States and some unformed alliance. Note that there are no invitations from NATO or European capitals for the Gulf states to choose them over Putin. Instead, there’s hydrogen and new LNG deals.
What the White House sees as the growing bifurcation of the global political economy between authoritarian capitalism and liberal democracy is actually a reconnection of global trade and investment relationships, along with the effect of a national cocoon of collapsing globalization. These are not the same things. US partners in the Middle East feel particularly vulnerable to these trend lines. They see threats to the US commitment to security in the region and worry about how they will investigate US “pro-friend” industrial policy. Al Khaleej’s business and investment partners are global, generally in emerging markets and Asia.
What is certainly true is that energy markets are now highly politicized. The United State He is now an advocate of market manipulation, demanding advantages from the world’s swing primary producer, calling for caps on Russian crude export prices and a ban in Europe. Meanwhile, the United States bought very little Russian oil before the ban imposed by the Biden administration last March, and faces little harm from the oil cut. In Congress, there is pending legislation that proposes limiting US energy exports and legislation, called “NOPEC,” which would encourage litigation against state entities that might also attempt to coordinate pricing. It’s free for everyone.
Two forecast assumptions prompted Saudi Arabia and its OPEC+ partners to cut production. Both were driven by a feeling of insecurity in the market. First, OPEC+ and Saudi Arabia accept the thesis Global demand for oil will weaken Because a recession is imminent, primarily driven by uncertainty about China’s growth. Second, there is uncertainty about Russia’s isolation, how production might be halted in the future, and how alternative solutions to sanctions and a price cap will affect the customer base of other OPEC members, particularly in Asia. Keeping Russia in the OPEC+ fold is not so much a political consensus as the fear of underpricing and losing market share in the long term in Asia. Price capping, a cartel of buyers led by Western countries, is the kind of economic statecraft that oil producers like Saudi Arabia fear. While many economists see the price ceiling as likely to fail, the initiative points to something more powerful. Namely, there is a growing alliance against the product and its assets, something that could accelerate the decline in demand for oil and gas from the West for political and climate reasons.
Oil markets have become accustomed to some ambiguity in production targets as opposed to exporting the actual product to the market. The reaction to the October 5 announcement of a production cut of 2 million barrels per day was not a huge price hike. This is because it is known that most of the current OPEC members are unable to meet Produce rations. The Saudi argument that trying to restrict production in order to stimulate investment in the sector with a slight rise or a more stable price point is consistent with their old view that the sector suffers from years of underinvestment. But this advice coming from a state-owned oil company investing in its own production capacity is a little hard to accept. Had Saudi Arabia and OPEC+ just announced a 1 million barrel per day cut and just cut 800,000 barrels (as many expect it to be now), bilateral policies would not have slipped into the current abyss.
But it is possible that the descent of the bilateral relationship between the United States and Saudi Arabia has been predetermined. If the target of White House wrath is actually Russia, not Saudi Arabia, President Biden might try to break Russia by breaking OPEC+, letting Saudi Arabia go as collateral damage. Saudi Arabia has few friends in Washington, as the White House and a growing number of members of Congress do not want to be associated with Saudi Arabia or its crown prince. NOPEC is not new, nor are calls to halt sales of military equipment to Saudi Arabia. The effect could be a new type of energy and market policy that will be hard to tame.
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