No previous U.S. government nor its now second-term President Donald Trump are known for their forgiving natures of supposed past betrayals. This is particularly true when the transgressor has been an entity on which both have been forced to rely for any length of time. Saudi Arabia as one of the world’s leading oil suppliers and the de facto leader of oil cartel OPEC for decades has been regarded with deep distrust by Washington since it catalysed the 1973/74 Oil Crisis at a time when the U.S. and its allies were still dependent on it for oil, as analysed in full in my latest book on the new global oil market order.
This feeling intensified with the subsequent oil price war launched by Saudi Arabia in 2014 designed specifically to destroy the U.S.’s then-nascent shale oil industry as also detailed in the book. With a new oil market forecast from the International Energy Agency (IEA) foreshadowing oil prices well below those needed for Saudi Arabia to balance its budget in the years to come, it appears that Washington will finally “not have to put up with any more crap from the Saudis”, as a senior Washington-based legal source exclusively told OilPrice.com.
There is one critical economic reason and one crucial political one why sitting U.S. presidents want to keep oil prices at the lower rather than higher end of historical averages. The economic rationale centres on the close correlation between oil prices and the wider health of the U.S. economy. Historical data highlights that every US$10 per barrel (pb) or so change in the price of crude oil results in around a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion or so per year in consumer spending is lost. The political reason is that since 1896, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven.
The same pattern broadly applies to the re-election chances of candidates of any sitting president’s party in U.S. mid-term elections as well, the outcome of which affects the ability of the incumbent leader to push ahead with their legislative agenda for the last two years of their presidency. In any event, the statistics make sober reading for incumbent U.S. presidents and the senatorial, congressional and gubernatorial candidates of their party when considering how to handle domestic and international policies related to the oil price. Consequently, it is not surprising -- as Bob McNally, the former energy adviser to former President George W. Bush put it – that, “Few things terrify an American president more than a spike in fuel [gasoline] prices.”
Trump’s view when he began his first term as president on 20 January 2017 was that the oil price needed to trade in a US$40-45 per barrel (pb) of Brent to US$75-80 pb range – ‘The Trump Oil Price Range’. The floor was seen as the price at which most U.S. shale oil producers could make a decent profit, and the ceiling was seen as being most advantageous for U.S. economic growth. However, at that point the Saudis were still trying desperately in 2017 to repair the appalling damage its 2014-2016 Oil Price War had done to its own finances and to those of its OPEC brothers, so they embarked on coordinated production cuts (with Russia as the new-found member of the expended ‘OPEC+’ cartel) to push the oil price higher. Harking back to the original 1945 U.S.-Saudi Arabia agreement that balanced oil against security as also examined in my latest book, Trump said: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it.”
He added: “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” Following Trump’s direct and clear warnings to Saudi Arabia’s Royal Family in the third quarter of 2018 of the catastrophic consequences if the Kingdom continued to keep oil prices higher than the US$80 per barrel Brent price ceiling, Saudi Arabia increased production and oil prices came down again. That period was the only part of Trump’s presidency that saw his Oil Price Trading Range breached to the upside.
That said, the ceiling of this range is well below the recent levels that Saudi Arabia has needed to fully restore its finances to where they were before the onset of the 2014-2016 Oil Price War. This pricing discrepancy prompted Saudi Arabia to launch another oil price war in 2020 using the same strategy that had previously failed in 2014-2016 and towards the same aim of setting back the seemingly inexorable advance of the U.S. shale oil sector.
Trump’s reaction to this was even more aggressive than before, with a telephone call made on 2 April (according to a very senior source in the White House spoken to by OilPrice.com at the time) in which he very clearly told Saudi Crown Prince Mohammed bin Salman that unless OPEC started cutting oil production – so allowing oil prices to rise (above the danger zone for U.S. shale oil producers) – that he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from Saudi Arabia. It was also made very clear by Trump that the next time the Saudis tried the same thing it would be the end of the 1945 Agreement between the U.S. and Saudi Arabia. This, said Trump, would involve the immediate withdrawal of all U.S. military assistance from the Kingdom, without further notice. Following that, Saudi Arabia and OPEC gradually cut oil production to bring prices back up.
As of now, Saudi Arabia’s 2025 fiscal breakeven price per barrel of the Brent crude benchmark is a minimum of US$90.9, according to IMF figures. So bad are the real-world ramifications of this that several ‘Vision 2030’ projects – aimed at reducing the Kingdom’s dependence on oil -- have either been suspended or radically reduced in size, including the flagship Neom City development. Initially-costed at US$1.5 trillion the linear city project located has been cut back in size from 106 miles long to just 1.6 miles long. A deficit on both the current account and budget are still in place, and according to economic data sources Saudi Arabia’s public debt jumped 16% to over US$324 billion last year. “This gap between the spot Brent price and the level the Saudis need to breakeven fiscally looks set to run and with retaliatory options cut off now Trump’s in power, it looks like they’ll have to keep going to the debt markets to fill it,” a senior source in the European Union’s energy security complex exclusively told OilPrice.com last week.
“This is likely to make it [Saudi Arabia] even more reliant on the U.S. over time, given the dominance of the country in the global bond markets,” he added. On top of all this, Trump ordered the ‘No Oil Producing and Exporting Cartels’ (NOPEC) Bill be made fully ready to be passed into law at minimal notice, as a further deterrent to be used against Saudi Arabia. The NOPEC Bill would make it illegal to artificially cap oil production or to set prices, as OPEC does under the leadership of the Kingdom. The Bill would also immediately remove the sovereign immunity in U.S. courts for OPEC as a group and for every one of its individual member states. This would leave Saudi Arabia open to being sued under existing U.S. anti-trust legislation, with its total liability being its estimated US$1 trillion of investments in the U.S. alone.
The U.S. would then be legally entitled to freeze all Saudi bank accounts in the U.S., seize its assets in the country, and halt all use of U.S. dollars by the Saudis anywhere in the world (oil is denominated in U.S. dollars, of course). It would also allow the U.S. to go after Saudi Aramco and its assets and funds, as it is still a majority state-owned production and trading vehicle. This would mean that Aramco could be ordered to break itself up into smaller, constituent companies that are not deemed to break competition rules in the oil, gas, and petrochemicals sectors or to influence the oil price.
By Simon Watkins for Oilprice.com
