Saudi crown prince ensures higher oil prices continue
What the crown prince wants, the crown prince gets.
International crude oil prices broke above $80 a barrel this week on news that the Organization of the Petroleum Exporting States, Russia and their allies are not in a big hurry to meet President Donald Trump’s demand for cheaper fuel. This should come as no surprise.
OPEC is led by Saudi Arabia, and the kingdom’s Crown Prince Mohammed bin Salman announced in April that $70 oil was not going to cut it. Saudi officials hinted to Bloomberg News at the time that $80 a barrel will allow the nation to pay for reform plans and not slow the global economy.
"We believe oil prices will get higher in this year and also get higher in 2019,” Salman told Time magazine in early April. When you lead the organization responsible for a third of the world’s oil production, it’s easy to make your predictions come true.
Oil is a globally traded commodity, so Brent crude, the international benchmark, drives local gasoline and diesel prices. Politicians know that little spreads unhappiness quicker than higher fuel prices.
In April, I wrote that Texas oil
and gas explorers should send the crown prince a thank you note for setting prices at a comfortable level for all. After all, American shale drillers were responsible for flooding the world with crude and triggering the price collapse in 2014.
Texas oilers should also thank Salman for the tough-love life lessons. OPEC initially allowed the oil price to float freely, which led to 18 months of prices below the cost of production. Salman had hoped those low prices would break the Permian Basin, but instead, operators learned how to drill more cheaply.
Low prices, though, also hurt OPEC nations and Russia, which is why they formed an unprecedented coalition to cut production in late 2016. Prices have trended upward ever since. This coalition, which pundits call OPEC+, met last weekend to discuss next steps.
No one was more disappointed than Trump. He wants to take nearly 2 percent of the global oil supply off the market through sanctions on Iran, but he doesn’t want to pay higher oil prices. Sensing the danger in higher pump prices ahead of the midterm elections, he employed his style of diplomacy.
"OPEC and OPEC nations are as usual ripping off the rest of the world, and I don't like it. Nobody should like it," he told the U.N. General Assembly on Tuesday. "We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices … we are not going to put up with it, these horrible prices, much longer."
Comments like this do not help matters. Saudi Energy Minister Khalid Al-Falih said OPEC+ would maintain the current quantity of oil on the market. The coalition will make up for any shortfalls from Venezuela’s economic collapse or U.S. sanctions, but the alliance will not expand production.
Oil-producing nations need prices at $80 to begin recovering from years of economic hardship caused by low prices, said Jim Krane, an expert on energy geopolitics at Rice University’s Baker Institute.
“This is a sweet spot for them; it’s as high as you can get without destroying demand,” he said. “The prudent ones know they need to retool their economies, and they need to do that on the back of high oil prices while they can get it.”
Salman’s Vision 2030 plan to overhaul the Saudi economy relies on generating as much cash from oil as possible before demand drops. The advent of electric cars and stricter emission regulations have created real doubts about how long demand for oil will grow.
Public opinion is also important, even to authoritarian monarchies. Trump is unpopular in the Middle East for his policies toward the Muslim world. No leader wants to kowtow to him.
“These ministers do not want to be Trump’s errand boys, and so that’s going to make it tougher on them to raise production. If they do, they’ll be seen as caving into Trump’s demands,” Krane explained.
When given a choice between bolstering domestic finances and popularity or pleasing Trump, the choice for Middle Eastern leaders is easy. They know the U.S. can no less afford to lose regional allies. No one here has the upper hand.
And after all, Trump’s trade war may solve the problem of higher oil prices by slowing down global demand for fuel. IHS Markit, an economic advisory firm, reduced forecasts for economic growth this week due to the tit-for-tat tariffs with China.
Lowering oil prices that way, though, has serious side effects. Not the least for Texas oil companies.