Does Saudi Arabia in its pursuit of a secure share of the world oil market have the nerve to take on its principal supporter and patron? Will those in power in Riyadh take the risk of challenging US economic interests as a new president comes into power in Washington?
The Opec states meet on Wednesday to discuss a co-ordinated cut in production designed to rebalance an oversupplied market. In advance of that meeting, the gamesmanship goes on. The Saudis are producing at record levels while Iran continues to increase output — opening three new fields in the past few weeks alone. There is little sign that the promised cuts will be delivered when the cartel meets and, unsurprisingly, prices have fallen back to around $45 a barrel.
The Saudi response to this stalemate has been to threaten a further increase in production to 11mbd or more. The assumption is that other producers can be pressured into cutting back to give the Saudis a bigger market share. That starts with Iran but extends to the US. In the new world order after the US presidential election the approach looks risky at best and potentially an act of serious self-harm.
Without an agreement the price will keep falling. Stocks are high and the International Energy Agency predicts “relentless supply growth” from both Opec and non-Opec sources through 2017. New fields are due on stream in Brazil, Canada and Kazakhstan. There is no sign of significant demand growth. The falling price will further destabilise countries dependent on oil revenue, from Nigeria to Venezuela. Any Saudi production increase can only make all this worse. The government in Riyadh must have concluded that Opec states will just have to take the pain. But with the US they should be more careful.
Many American producers of tight oil from shale rocks are struggling financially. In general, the sector has adjusted to working at $50 — but not $40 or below, which is where we could be heading. Having staved off the problems for the last year, the time is coming when the bills just cannot be paid, and some companies will have to close their doors.
Is that not the market working, with competition forcing the weaker players out? Of course, but it is also true that the Saudi regime relies on US defence guarantees, which involve extensive military and political support. The relationship has been strained under President Barack Obama but that will be nothing compared to what will happen if Saudi actions lead to the closure of significant parts of the US shale industry, with the associated loss of jobs and revenue. Donald Trump does not belong to the strand of Republican opinion that holds the Saudis in high regard.
An unhappy US government could do many things in response to any threat to American jobs. It could start by publishing in full the findings of the congressional inquiry into the 9/11 attacks — including any involvement of Saudi Arabia — and intelligence on other conflicts in which American lives have been lost. Mr Trump could also withdraw backing for the Saudis in Yemen. And he could renegotiate or even remove some defence ¬guarantees.
The Saudi lobby would say that arms sales to Saudi Arabia provide tens of thousands of jobs in the US, which no administration in Washington would ever jeopardise. That is simply wrong. Any Saudi government will need to buy US equipment. What Washington requires is a stable administration in Riyadh, which includes a degree of order that can only be achieved if Saudi Arabia takes the lead in managing the oil market with a production cut of 1.5-2mbd lasting for two or three years.
For the Saudis this is painful. But pain, in the interest of market stability, may be a better outcome than an open confrontation with a country that has protected them for the past five decades.
Source: Nick Butler /
The writer is visiting professor and chair of the Kings Policy Institute in London
Credit: FT
