There’s a US$15 solution to the Us-saudi oil feud
THE relationship between Washington and Riyadh has reached that stage where Saudi Arabian officials give TV interviews to say how good it is.
The current tiff has deep roots but the immediate problem concerns – what else? – oil, where the United States and Saudi Arabia have been pulling in opposite directions.
President Joe Biden has released about 165 million barrels from the Strategic Petroleum Reserve, or SPR, since March to moderate prices.
Meanwhile, Saudi Arabia has sought to support prices by curbing supply, most dramatically with the two million barrel a day target cut announced by the Organisation of the Petroleum Exporting Countries plus (Opec+) in early October, drawing fire from the White House and Congress.
Beneath these cross-purposes, however, may be a sliver of common ground.
A month ago, the White House announced a plan to refill the SPR when oil prices fell to US$67 (RM305) to US$72 (RM328) a barrel.
By establishing an effective put in the market, the idea is to encourage domestic producers to drill for more oil.
Meanwhile, with its dramatic cut, Opec+ also sought to establish a floor under a price that had dropped
from over US$120 (RM546) in June to around US$85 (RM387) when the meeting happened.
That points to a floor of about US$70 (RM319) for the United States and a floor of about US$85 (RM387) for Saudi Arabia and its Viennese entourage. The US$15 (RM68) difference looks like a decently narrow gap to bridge.
On the surface, the two countries are coming from very different directions: US politicians like low oil prices while Saudi princes depend on high ones.
But there are nuances. If oil prices drop too low, the US oil industry, the biggest in the world, suffers, too. That risks production and a backlash in states that host the industry.
Even Saudi Arabia, despite competing with the frackers, shouldn’t want to crush them: They represent a bulwark against more ambitious energy-transition policy in the United States.
Meanwhile, as much as Riyadh’s coffers overflow when oil prices spike, the associated inflation and volatility risk recession and intensified efforts to switch away from oil in consuming countries.
The optimal outcome is an oilprice range that Texas can rely on, Washington can stomach and Riyadh can live with.
On that basis, a market in which Riyadh knows Washington would release strategic barrels when the price hits, say, US$100 (RM455) but buy them back when it sinks to, say, US$75 (RM343) – and where Riyadh also works toward maintaining that band – could foster a more stable relationship.
The United States emerging as an active manager in the oil market would mark a sea change.
The world’s biggest consumer of oil has been a price-taker since the 70s and the SPR has been effectively regarded as dead oil, only to be used in the most dire of circumstances.
Yet the SPR was set up in the context of price controls, which, due to their distorting effect, actually fostered physical shortages.
Today, with oil priced by the market, it is less the prospect of pumps running dry that threaten the US economy and more what happens to the price on those pumps when supply and demand tighten.
To witness Russia invading Ukraine and withholding energy supplies, oil spiking to US$120 (RM546) and Opec+ unable or unwilling to fill the gap, and then
sniff that the SPR must be reserved for emergencies is to define an emergency in an absurdly narrow fashion.
Did Biden have the mid-terms in mind as petrol raced toward US$5 (RM23) a gallon?
Of course. That doesn’t change the fact that genuine supply shocks threatened our economic wellbeing.
Ed Morse, Citigroup Inc’s global head of commodities research, estimated in a recent report that the world’s commercial inventories of oil and barrels in transit increased by 273 million barrels this year through October, versus 239 million barrels released from strategic stockpiles, mostly from the United States.
In other words, that transfer of state-controlled oil – usually disregarded by the market – provided a significant boost to the commercial stocks watched by traders, and thereby eased panic.
When Prince Abdulaziz bin Salman, the Saudi energy minister, recently decried buffer stocks being used to “manipulate markets,” not only did he drown irony in a barrel of crude, he seemingly ignored how much the world has changed.
The United States has shifted from being the biggest net importer of oil to being the largest producer and a (small) net exporter.
Moreover, it will not be lost on any US politician that Biden’s intervention may well have aided
Democrats in bucking the midterms curse.
China’s strategic reserves
Just as China is beginning to test its own strategic reserves as a tool to tame inflation, so Saudi Arabia should contemplate the SPR becoming an ongoing participant.
Equally, however, the United States must recognise Saudi Arabia’s legitimate concerns.
The country’s emergence as an independent power owes much to the old, Cold War-induced constellation of forces that underpinned the oil-for-security deal with Washington.
Over the past two decades, not only has the United States re-emerged as a major oil producer, its commitment to post-war security arrangements and globalisation appears to have waned.
While Biden’s antipathy toward Riyadh is quite open, don’t forget that his predecessor, despite the glowing-orb diplomacy in Riyadh, stood pat after an unprecedented, and likely Iran-directed, drone-attack on critical Saudi oil infrastructure in 2019.
In a recent insightful essay for Foreign Affairs, Karen Young of Columbia University’s Centre on Global Energy Policy argues Saudi Arabia, seeing the old order unravel and global action against climate change accelerate, aims to use its oil-derived power and wealth for as long as it lasts.
Not only does it need funds to pay its bills and diversify its economy, it also seeks to leverage its oil power to craft a non-aligned foreign policy less beholden to a more distant superpower.
Saudi protects own interests
On that reading, while Washington’s ire at the pre-midterms timing of that Opec+ supply cut was only to be expected, Saudi Arabia was merely protecting its own interests by arresting a slide in its oil revenue.
Despite the immense challenges – and ongoing disagreements – involved, the United States should support Riyadh’s efforts to overhaul its economy.
For all the renewed dreams of energy independence amid the shale boom, the United States and its allies remain enmeshed in the global oil market.
The SPR, while a powerful tool, is ultimately a finite stock of oil that pales in comparison to Saudi Arabia’s 11 million-barrels-a-day flow.
Similarly, for all their power, a US president’s political stock consists of a finite number of days in office – that can be shortened by an energy crisis – versus the House of Saud’s effectively open flow of time.
An agreement to work in tandem, rather than at odds, on an oilprice band that enables Riyadh to balance its books is in US interests.
That extends to the issue that would seem to present irreconcilable differences: climate change.
Passage of far-reaching federal climate legislation this summer pushes the US further toward the decarbonisation that presents an existential threat to Saudi Arabia’s economic model.
Yet the massive turnover in fixed assets, and behaviours, required for the energy transition means it will be anything but smooth.
Even under ambitious green scenarios, there will be a need for reliable supplies of conventional fuel to power the incumbent system for years to come.
On the surface, the two countries are coming from very different directions: US politicians like low oil prices while Saudi princes depend on high ones.
Pump-price anxiety
As Democrats’ evident pumpprice anxiety demonstrates, keeping the cost of those conventional fuels stable amid the disruption of change is vital if the green agenda isn’t to be derailed by the nasty politics of inflation.
An oil-market put that’s backed by SPR purchases could help US producers – and, more importantly, their investors – over the hump of recommitting to drilling in an uncertain world.
Similarly, just as Saudi Arabia accepts US geopolitical priorities are shifting, so it should accept the
climate genie is now decisively out of the bottle.
Given the kingdom’s interest in supporting oil demand for as long as possible, working with Washington on stabilising prices could offer a useful tool in managing the transition from an economic point of view.
As much as their visions of the future differ, both countries could use a stable oil market to get there. — Bloomberg