US-Saudi Relations at an All-Time Low Amid Oil Politics

The US and Saudi Arabia's Complex Relationship in the Global Energy Market:

The relationship between the United States and Saudi Arabia has been a critical one in the global energy market for decades. However, recent events have brought their complex relationship into sharper focus. The US and Saudi Arabia have accused each other of market manipulation, political interference, and even aligning with Russia. These allegations have significant implications for the global political economy and the energy market.

OPEC+ Production Cuts and Political Motivations:

On October 5, 2021, OPEC announced that it would cut group oil production by two million barrels per day. This announcement was led by Saudi Arabia but included informal OPEC+ members, notably Russia. Last week, the Biden administration accused the Saudi government of aligning with Russia. The fallout from these allegations has roiled global energy politics and markets.

Saudi Arabia claims that the Biden administration attempted to convince the Saudi leadership to delay any production cuts and OPEC+ announcements until after the midterm elections. The White House, on the other hand, claims that the request was less time-delineated and was to wait until markets settled. While the OPEC+ decision was meant to be collective and unanimous within its alliance, markets had anticipated a cut of about half that much. It is unclear whether the decision to announce a larger cut was hasty or politically motivated by Saudi political leadership (rather than technical advice). The general perception is that the Saudi leadership had a preference for the previous US administration.

Allegations of Saudi Arabia Aligning with Russia:

The accusations that Saudi Arabia has weaponized oil to aid Russian President Vladimir Putin are extreme. Saudi Arabia, the United Arab Emirates, and all of OPEC are in business with Russia. Russia is a criminal, weakening state and a wily business partner. The Saudi leadership may assume that keeping Putin in the OPEC+ tent is more valuable than trying to influence oil markets without him. The White House, and members of Congress, including Senate Foreign Relations Committee Chair Bob Menendez, are drawing a line in the sand in which Putin is on one side, but the other side is the US and some unformed coalition. Noticeably, there are no calls from NATO or European capitals for Gulf states to choose them over Putin. Instead, there are new hydrogen and LNG deals.

Global Trade and Investment Ties:

What the White House sees as a growing bifurcation of the global political economy between authoritarian capitalism and liberal democracy is actually a rewiring of global trade and investment ties, along with a national cocooning effect of deglobalization. These are not the same things. Middle East partners of the US feel especially vulnerable to these trendlines. They see threats to the US commitment to security in the region and worry about how they might fare in a “friend-shoring” American industrial policy. The Gulf’s trade and investment partners are global and generally in emerging markets and Asia.

Politicization of Energy Markets:

The trend of energy markets becoming increasingly intertwined with politics, both domestically and internationally. As countries seek to protect their own energy interests, they may engage in actions such as market manipulation, price caps, and embargoes, which can have significant impacts on global energy markets and the economies that depend on them. This politicization can also lead to accusations of one country using energy as a weapon against another, as seen in the accusations of Saudi Arabia aligning with Russia in oil production cuts. The result is a complex and dynamic global energy landscape that is influenced not only by economic and technical factors but also by political considerations.

The OPEC+ production cut announced on October 5, 2022, has created a ripple effect in the global energy markets. The move was prompted by a sense of market insecurity and geopolitical tensions, with two key forecasting assumptions guiding the decision to cut production. This article delves deeper into the factors behind the cut, the implications it may have on the future of fossil fuels, and the growing coalition against them.

The Rationale Behind the OPEC+ Production Cut:

The OPEC+ production cut was driven by two primary factors:

  • Global Demand for Oil to Weaken Due to Impending Recession: OPEC+ and Saudi Arabia anticipate a slowdown in global demand for oil due to an imminent recession. The uncertainty surrounding China's economic growth is viewed as a primary contributor to this impending recession.
  • Uncertainty Surrounding the Isolation of Russia and Its Impact on Future Production: Another key factor prompting the production cut is the isolation of Russia and the potential impact it may have on future production. OPEC+ members fear being undercut on price and losing longer-term market share in Asia. As a result, keeping Russia in the fold of OPEC+ is viewed as crucial, and a price cap is seen as an effective tool to prevent Western countries from forming a buyers' cartel.

Implications of the OPEC+ Production Cut:

The OPEC+ production cut is being viewed as a potential game-changer in the global energy markets. Here are some key implications to consider:

  • Growing Coalition Against Fossil Fuels: The initiative to cap oil prices is viewed as a form of economic statecraft and signals a growing coalition against fossil fuels and their origins. This could expedite the decline in oil and gas demand from the West, both on political and climate justifications.
  • Possible Failure of Price Cap: While many economists view the price cap as likely to fail, the initiative itself is a powerful signal that there is a coalition forming against fossil fuels.
  • Saudi Arabia's View of the Sector: The Saudi argument that constraining production can incentivize investment into the sector with a slight rise or more stable price point is consistent with their long-standing view that the sector is suffering from years of underinvestment. However, this advice coming from a state-owned oil company that invests in its own production capacity is viewed with skepticism.
  • U.S.-Saudi Bilateral Relationship: The production cut has strained the already fraught U.S.-Saudi bilateral relationship, with the White House and a growing number of members of Congress refusing to be associated with the Saudi kingdom or its crown prince.

Conclusion:

The recent OPEC+ production cut has brought to the forefront the growing politicization of energy markets and the coalition forming against fossil fuels. While the exact impact of the production cut remains to be seen, it is clear that the future of the energy markets is becoming more difficult to predict and control. With increasing geopolitical tensions and climate concerns, the role of fossil fuels in the global energy mix is likely to diminish in the years to come.