Soaring oil prices cast shadow on US ahead of Opec meeting
In November 2018, Donald Trump tweeted: “Oil prices getting lower … a tax cut for America and the world! Enjoy! $54 … Thank you to Saudi Arabia.”
Five months on, with oil prices more than $70, Trump will be in a less celebratory mood as Opec’s oil ministers and their allies gather in Jeddah on Friday, without Iran. The main agenda item will be the implications for oil of three interconnected American foreign policy crises – in Venezuela, Iran, and Libya. Together these crises, being played out simultaneously, have the potential to scrub as much as 3.5m barrels of oil per day from the markets.
Rarely has there been a moment when a US foreign policy has had so much potential to cause such dislocation to oil markets, and as a result to hand so much market power to America’s Gulf allies to exploit that belligerence.
The energy ministers will be in the enviable position of being able to survey both projected rising oil demand for the remainder of the year, just as US foreign policy forces a contraction in supply.
The prospect is that the price of oil – which has already risen by 40% this year to more than $72 a barrel – could go much higher.
For Saudi Arabia, needing an oil price greater than $80 a barrel (and in the range of $85–$87 for the current year) in order to balance its budget, this is a welcome gift.
That the countries cheering on the Republican hawks stand most to benefit through higher oil prices is not lost on oil producers in the firing line of US foreign policy, notably Libya and Iran.
Indeed, the risks to the oil market, and the world economy, of three simultaneous disruptions to the oil market have become a lobbying point for the Iranians and Libyans as they urge Europe to challenge US policy.
Among the three oil-producing countries facing American pressure, it is Iran that is finding its oil exports most curtailed by US actions.
Iranian oil production at its peak had reached 3.83m barrels a day in 2017 and is now down well below 2.5m. By unexpectedly ending all sanctions waivers on Iranian oil exports, the US last month signalled it wanted to drive Iranian exports towards zero. Iran has so far unsuccessfully lobbied a reluctant India and China, the two largest importers of Iranian oil, to risk US sanctions and continue buying. The same applies to Turkey.
There have been reports that Iran thinks it could survive with exports at 1.5m bpd, but the IEA projected this week that by the summer sales are likely to tumble to below 0.7m bpd, the lowest since the Iran-Iraq war in the 80s and a figure that would put the Iran nuclear deal in jeopardy.
In Venezuela, production peaked at about 2.60m bpd in early 2012 but has steadily crumbled to 0.80m due to US sanctions, mainly imposed from August 2017, long-term mismanagement, and more recently power blackouts. There is no sign that the US will lift the sanctions so long as the disputed President Nicolás Maduro clings, with Russia’s support, to power.
In Libya, the National Oil Corporation had plans to boost production up to 1.4m bpd by the end of the year, but that looks optimistic in light of Gen Haftar’s attack on Tripoli. That attack has been unchallenged by Trump reportedly following lobbying in Haftar’s favour by Saudi Arabia.
Production is currently 1.17m bpd, and most oilfields are in the control of Haftar’s forces but are deeply vulnerable to attacks. Mistratan forces, opposed to Haftar, can readily use the coastal road to reach the Libyan oil crescent facilities that produce 585,000 bpd.
Mustafa Sanalla, the chairman of the Libyan National Oil Corporation, one of the few truly national institutions in the country, said: “I cannot foresee any scenario, other than an immediate ceasefire, in which Libya’s oil exports are not severely impacted by the conflict.”
So the cumulative impact of the three American interventions, or in the case of Libya’s non-intervention, is that the markets could be deprived of as much 3.5m bpd.
The question is just how Saudi Arabia chooses to benefit from the US policy they have advocated, for instance either by stepping in to supply former Iranian customers or instead profiting by letting prices rise. It is possible they will try both. So far the Saudis have resisted a call by Trump to raise production, saying inventories are strong enough.
In Asian markets, Saudi Aramco’s state-owned oil giant has already raised its official selling price for June cargoes of its flagship Arab Light crude to the biggest premium versus Middle East benchmark prices in 11 months. The cost of the Arab Medium variety was set at the highest since December 2013, while Arab Heavy was increased to the most in over six years.
But the Saudis know Trump’s multiplying crises cannot become a brazen personal bonanza. The Saudi royal family gave undertakings that sanctions against Iran will not lead to oil shortages and, by June, its energy ministers will be under pressure from Trump to boost production. A massive oil price shock this autumn would simply drive US consumers to shale markets, renewables and the Democrats.
As one British minister said this week, “the risk of this proving unmanageable and blowing up in our faces is growing”. In an index of the current volatility, oil prices rose by more than 1% on Tuesday when Saudi Arabia claimed explosive-laden drones launched by a Yemeni-armed movement aligned to Iran had attacked pipelines belonging to the state oil company Aramco. Withdrawal of US diplomats from Iraq led to another spike.
Similarly, the still-unexplained acts of sabotage on commercial and civilian ships near the territorial waters of the United Arab Emirates at the weekend spooked markets, and revived memories of the tanker wars of the 1980s.
Even if Iran was not directly implicated in the attacks, it has awakened the periodic fear that Tehran would seek to close the Strait of Hormuz, the two-mile-wide shipping lane through which a fifth of oil production passes from the Gulf to wider markets. Push Iran too far, and it may not just be the nuclear agreement that gets shut down.
Energy markets are not a zerosum game in which everything turns on Saudi decisions. There are many moving and opposing parts. But it is striking, and possibly unwise, how much Trump’s national security adviser John Bolton’s choice of foreign policy battlegrounds has conspired to make the US so dependent on its Gulf allies, and how much those allies stand to benefit.