In the Saudi-Russian oil price war, the US blinks first
President Trump said Thursday that he was “a little torn” on how to address the differences between Saudi Arabia and Russia in their oil-price war but would intervene in oil markets at the “appropriate time.” Many people probably would interpret those phrases as indicating that the president is under enormous pressure to do something but doesn’t like the options he has been offered.
It’s now two weeks since Saudi Arabia (representing the OPEC cartel) and Russia (the leader of “non-OPEC” oil producers) failed to agree on production cuts that would have supported the already weak oil price. Saudi Arabia’s Crown Prince Mohammad bin Salman, aka MbS, then ordered his taps to be opened to flood the market, a move imitated more modestly by President Putin in Moscow.
We, the average consumers, all like low-priced gasoline but this isn’t the aim of Messrs. Putin and MbS. They individually want to control the market and try to set a new, higher price. What price? Riyadh’s budget is based on a notional $75-plus barrel of oil. For perspective, West Texas Intermediate (WTI) crude dropped on Thursday to just above $20 per barrel before recovering to around $27.
The WTI grade of crude oil is particularly significant because it is a barometer of the U.S. shale oil industry, which has transformed the nation. The U.S. is once again “energy independent” and has a surplus to export. Mr. Putin, for one, hates American shale, which he blames, with some good reason, on the weak price of oil in recent months. He would be delighted if the industry could be damaged by low profitability, even ruined.
This is President Trump’s dilemma: How to safeguard what he regards, correctly or not, as one of his signature achievements without making apparent concessions to Moscow. To make it worse in an election year, the shale oil workers and their families are probably mainly Republicans and Trump supporters.
Compounding the decision-making challenge is how to deal with Saudi Arabia, where MbS — close friend to U.S. presidential son-in-law and adviser Jared Kushner — reportedly was the one who decided on the timing and depth of the price war. After months of comparatively low profile, MbS is very much back, making what to many are again controversial decisions.
If there is any justice in all this, it is perhaps the ruination of the bromance between Putin and MbS. For many, the images from the 2018 Buenos Aires G-20 economic summit are still vivid. Held two months after the murder of Saudi dissident journalist Jamal Khashoggi, most world leaders applied what in these coronavirus days would be called “social distancing” towards MbS, while Putin was transparently MbS’s buddy.
Today’s world crisis undoubtedly is a consequence of the COVID-19 virus, but the economic impact is being worsened by the simultaneous oil-price war. The impact of the virus on Russia is not particularly clear but Saudi Arabia has just stopped internal flights and train services, having earlier curtailed international travel.
Rising to what he judges to be the challenge, MbS, who will host this year’s G-20 summit in November, is trying to arrange a virtual G-20 gathering to discuss the virus next week. Yesterday his father, King Salman, gave a rare television address to say the kingdom was “taking all measures” to deal with the virus. When the news emerged of the king’s impending speech, some commentators thought that he would speak about oil. He made no mention of it, however.
This is perhaps the opportunity that President Trump should be looking for: There will be no U.S. support for the Saudi G-20 virus-crisis summit until the oil-price war is curtailed.
Such a diplomatic ruse does not have to be public. The value of summits anyway is often the personal off-the-record contact between leaders and high-ranking officials. And, as many of us have discovered in recent days, teleconferencing seldom works as smoothly as we would want.
Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.