There is a $15 solution to the US-Saudi oil dispute


The relationship between Washington and Riyadh has reached this stage where Saudi officials give TV interviews to talk about how good it is.

The current tiff has deep roots, but the immediate problem is — what else? — oil, where the United States and Saudi Arabia are pulling in opposite directions. President Joe Biden has released about 165 million barrels from the Strategic Petroleum Reserve, or SPR, since March to moderate prices. Meanwhile, Saudi Arabia has sought to support prices by limiting supply, most dramatically with the cut to the two million barrels per day target announced by OPEC+ in early October, drawing fire from the White House and Congress.

Beneath these cross-purposes, however, there may be a bit of middle ground. A month ago, the White House announced a plan to fill the SPR when oil prices fell to $67-72 a barrel. By establishing effective marketing, the idea is to encourage domestic producers to drill for more oil. Meanwhile, with its dramatic cut, OPEC+ also sought to bottom below a price that had fallen from over $120 in June to around $85 by the time of the meeting.

This indicates a floor of around $70 for the United States and a floor of around $85 for Saudi Arabia and its Viennese entourage. The $15 difference looks like a pretty narrow gap to fill.

On the surface, the two countries are coming from very different directions: American politicians like low oil prices while Saudi princes depend on high prices. But there are nuances. If oil prices fall too low, the US oil industry, the largest in the world, will also suffer. This risks production and a backlash in states that host the industry. Even Saudi Arabia, despite its competition with the frackers, should not want to crush them: they represent a bulwark against a more ambitious energy transition policy in the United States. Meanwhile, even if Riyadh’s coffers overflow when oil prices soar, the associated inflation and volatility risk a recession and intensify efforts to dump oil in consuming countries.

The optimal outcome is an oil price range that Texas can rely on, Washington can endure, and Riyadh can live with. Based on this, a market in which Riyadh knows Washington would release strategic barrels when the price reaches, say, $100, but would buy them back when it drops to, say, $75 — and where Riyadh also strives to maintain that tape – could foster a more stable relationship.

The emergence of the United States as an active manager of the oil market would mark a radical change. The world’s largest consumer of oil has been a price taker since the 1970s and SPR was effectively considered dead oil, to be used only in the most dire of circumstances. However, the SPR was set up within the framework of a price control which, through its distorting effect, in fact favored physical shortages. Today, with the price of oil set by the market, it is less the prospect of dry pumps that threatens the US economy than what happens to the price of these pumps when supply and demand tighten.

To see Russia invade Ukraine and withhold energy supply, oil soar to $120 and OPEC+ unable or unwilling to fill the void, then to feel that the SPR should be reserved for emergencies is to define an emergency in an absurdly narrow way. Did Biden have mid-terms in mind as gasoline races toward $5 a gallon? Sure. This does not change the fact that real supply shocks have threatened our economic well-being.

Ed Morse, global head of commodities research at Citigroup Inc., estimated in a recent report that global commercial stocks of oil and barrels in transit increased by 273 million barrels this year through October, versus 239 million barrels from strategic stocks, mainly from the United States. In other words, this state-controlled transfer of oil – usually ignored by the market – has significantly boosted trading stocks watched by traders, and thus quelled the panic.

When Prince Abdulaziz bin Salman, the Saudi energy minister, recently denounced the use of buffer stocks to “manipulate markets”, not only did he drown the irony in a barrel of crude, but he apparently ignored how the world had changed. The United States has gone from being the largest net importer of oil to that of the largest producer and (small) net exporter. Moreover, no American politician will lose sight of the fact that Biden’s intervention may have helped Democrats stave off the midterm curse. Just as China is beginning to test its own strategic reserves as a tool to tame inflation, Saudi Arabia should consider the SPR becoming a permanent participant.

However, the United States must also acknowledge Saudi Arabia’s legitimate concerns. The country’s emergence as an independent power owes much to the old Cold War-induced constellation of forces that underpinned the oil-for-security deal with Washington (see this). Over the past two decades, not only has the United States become a major oil producer again, but its commitment to post-war security arrangements and globalization appears to have diminished. While Biden’s antipathy towards Riyadh is quite open, remember that his predecessor, despite glowing orb diplomacy in Riyadh, resisted after an unprecedented, and likely Iranian-led, drone attack. against critical Saudi oil infrastructure in 2019.

In a recent insightful foreign affairs essay, Karen Young of Columbia University’s Center for Global Energy Policy argues that Saudi Arabia, seeing the old order crumble and global action on climate change s Accelerate, aims to use its oil-derived power and wealth for as long as possible. it lasts. Not only does it need funds to pay its bills and diversify its economy, but it also seeks to leverage its oil power to craft a non-aligned foreign policy less beholden to a more distant superpower. From this reading, while Washington’s anger over the pre-mid timing of this OPEC+ supply cut was only to be expected, Saudi Arabia was only protecting its own interests by halting a drop in its oil revenues.

Despite the immense challenges — and lingering disagreements — involved, the United States should support Riyadh’s efforts to restructure its economy. Despite all the renewed dreams of energy independence amid the shale boom, the United States and its allies remain entangled in the global oil market. The SPR, while a powerful tool, is ultimately a limited supply of oil that pales in comparison to Saudi Arabia’s 11 million barrels per day flow. Likewise, for all their power, a US President’s political stock consists of a finite number of days in office – which can be shortened by an energy crisis – relative to the House of Saud’s effectively open time stream. An agreement to work in tandem, rather than in opposition, on an oil price range that allows Riyadh to balance its books is in the interests of the United States.

This extends to the issue that would appear to have irreconcilable differences: climate change. The passage of far-reaching federal climate legislation this summer pushes the United States further toward decarbonization that poses an existential threat to the Saudi economic model.

Yet the massive rotation of fixed assets and behaviors necessary for the energy transition means that it will be anything but smooth. Even in ambitious green scenarios, there will be a need for a reliable supply of conventional fuel to power the system in place for years to come (see this). As Democrats’ obvious anxiety over the price at the pump demonstrates, keeping the cost of these conventional fuels steady amid the disruption of change is vital if the green agenda is not to be derailed by nefarious government policy. inflation. A put in the oil market backed by SPR buys could help U.S. producers — and, more importantly, their investors — overcome the difficulty of re-committing to drilling in an uncertain world.

Likewise, just as Saudi Arabia accepts that the geopolitical priorities of the United States are changing, it should accept that the climate genie is now definitely out of the bottle. Given the kingdom’s interest in sustaining oil demand for as long as possible, working with Washington on stabilizing prices could offer a useful tool to manage the transition from an economic perspective. Even though their visions for the future differ, both countries could use a stable oil market to get there.

• Oil consuming countries must form their own anti-OPEC+: Carl Pope

• A permanent US-Saudi split? Look at these 3 events: Hussein Ibish

• What a “Saudi First” policy means for oil and electricity: Javier Blas

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Heard on the Street section of the Wall Street Journal and a reporter for the Lex section of the Financial Times.

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