The stab in the back that isn’t
The Biden Administration is portraying Saudi support for the OPEC+ reduction in oil production quotas as as betraying the Saudi-American alliance The Kingdom’s move also appears to align Riyadh with Moscow against Kyiv.
It doesn’t add up
There is a lot wrong with this perspective:
- The Saudis have never been US allies, either de jure or de facto. The relationship inaugurated in 1945 with a meeting between President Roosevelt and Saudi King Abdul Aziz has always been transactional. The US supplied security in exchange for moderate oil prices and reliable supplies. The relationship was not based on shared values or even common security concerns.
- Circumstances have changed. The US was once a major oil importer. It is now a modest net oil exporter. American hydrocarbon companies benefit handsomely from higher oil prices. Saudi Arabia in the 1970s and 1980s had trouble spending all of its oil revenue. It now requires prices of about $100/barrel in order to balance its national budget. Maintaining an absolute monarchy ruling over a much larger population is expensive.
- Saudi Arabia no longer maintains as much excess production capacity as once it did. It is down to perhaps 2 million barrels per day above current production levels. That is small compared to its previous excess capacity of 4 million barrels per day or more. This is in part due to the privatization of part of Aramco. That required the company to behave more like a profit-seeking enterprise rather than a a state-subsidized one.
- Oil around $100/barrel is required for the transition away from hydrocarbons. The many alternatives to oil and natural gas are far more competitive if the price of oil is high. You won’t be hearing this from the Green New Deal folks, but they know their interest in moving the US away from climate-changing carbon dioxide requires higher oil prices, not lower ones.
National interests prevail
What we are seeing is not a stab in the back, but a convergence of Saudi, Russian, and Iranian interests in higher oil prices. Riyadh, Moscow, and Tehran are all frightened that the impending slow-down in the world economy will lead to dramatic cuts in oil prices. Reducing production first serves their national interests.
The Americans are seeing all issues through Ukraine-tinted glasses. But others do not. Riyadh has made it clear it does not regard the Ukraine war as one in which it has a vital interest. This is not surprising. Even if the Kingdom did regard Ukraine as vital, why would an absolute monarchy with no regard for human rights favor Zelensky over Putin?
What is to be done?
The question is how the US should react. Proposals so far include continuing drawdown of the Strategic Petroleum Reserve (SPR), allowing lawsuits against OPEC for price-fixing and cutting arms sales to Saudi Arabia.
Continuing drawdown of the SPR makes obvious sense. Its one million barrels per day have moderated oil prices since the Russian invasion of Ukraine. The drawdown also returns substantial profits to the US Treasury (average acquisition price was about $30/barrel).
Cutting arms sales to the Kingdom doesn’t pass muster as a good idea. Riyadh will turn to others–read Russia or China or both–less fastidious about the conditions imposed. The Saudis like high tech American weapons. But they don’t really need them compete militarily with Iran, their only serious potential adversary in the region.
“NOPEC” legislation pending in Congress would allow lawsuits in the US against OPEC and OPEC+ for anti-competitive behavior. It is not clear that such lawsuits would be successful, or that they would lead to successful remedies. Nor would it likely improve relations with the Saudis. But at least this approach is consistent with US policy on monopolies and does not empower US adversaries.
Another approach, one politically less palatable, is to wait and see. If OPEC+ manages to maintain high oil prices, that will presumably incentivize alternatives worldwide. It won’t help the Democrats in the November election, but at least it is something the Biden Administration supports. If the world economy slows dramatically and prices either remain at current levels or fall, Biden will also have the last laugh.
RSS - Posts
