US-OPEC oil controversy spotlights Saudi Arabia ties - analysis

Thursday - 06/10/2022 06:39
OPEC is an intergovernmental organization founded in 1960 in Baghdad, and their decision to cut oil production is seen as potentially upsetting the US mid-term elections
(photo credit: RAMZI BOUDINA/REUTERS)
(photo credit: RAMZI BOUDINA/REUTERS)

The Organization of the Petroleum Exporting Countries (OPEC) has decided to cut oil production by 2 million barrels per day, creating the potential for economic fallout in the West, where markets are already wary due to the war in Ukraine and Russia tensions as well as the reverberations of COVID-19. Major western norms, such as relying on China for goods, are now called into question as well, as supply chains buckle and China continues to implement its lockdowns.  

OPEC is an intergovernmental organization founded in 1960 in Baghdad. It has 13 members, including Iraq, Iran, Venezuela, Saudi Arabia, Kuwait, and the UAE among others. Qatar, which was a member since 1961, terminated its membership in January 2019 amid a Gulf crisis between Doha and Riyadh.  

The decision by OPEC to cut oil production is seen as potentially upsetting the US mid-term elections and this has led to increased anger among US politicians over the cuts, which will actually begin in November after the election.

 

Reverberations of Saudi-US tensions

The anger at Saudi Arabia in the US could impact larger regional issues. Accusations that Riyadh has sided with Moscow could accelerate some of the processes that have taken place globally in the last few years, in which some countries have decided that the West is declining and that they should hedge their bets by working with Russia, Turkey, Iran or China.
 

 SAUDI CROWN PRINCE Mohammed bin Salman and US President Joe Biden gesture stand for a ‘family photo’ ahead of the Jeddah Security and Development Summit in Saudi Arabia, July 16. (credit: BANDAR ALGALOUD/COURTESY OF SAUDI ROYAL COURT/HANDOUT VIA REUTERS)
SAUDI CROWN PRINCE Mohammed bin Salman and US President Joe Biden gesture stand for a ‘family photo’ ahead of the Jeddah Security and Development Summit in Saudi Arabia, July 16. (credit: BANDAR ALGALOUD/COURTESY OF SAUDI ROYAL COURT/HANDOUT VIA REUTERS)


India has also appeared to hedge their bets, deciding not to condemn Moscow’s war in Ukraine despite western pressure. Of course, this brings the US “new world order” full circle because George H.W Bush decided to anchor his new world order during a speech over Saddam’s invasion of Kuwait. Now Kuwait and Saudi Arabia, as well as Iraq (which the US invaded in 2003), seem to have drifted away from Washington’s line.  

For voices in Washington, the anger of Riyadh’s position is palpable. Some of them feel betrayed, but others have argued for more than a decade that the US should end its partnership with Saudi Arabia and shift course to work with Iran or other countries.

In general, the historic view that US policy in the region was tied to US-Saudi, US-Turkey and US-Israel relations meant that America’s role was basically resting on these three pillars. Some voices dating back to the Obama administration wanted a radical shift in these foundations; making the US rely less on Jerusalem, Riyadh and Ankara. Unsurprisingly, all three of these countries could read the US media and commentary suggesting this shift, and so most of them made choices reflecting it.

The Trump administration shifted back to a policy that was linked to backing Israel, Saudi Arabia and Turkey. But by that time Turkey had already purchased the S-400s from Russia and Ankara was threatening NATO allies and also invading Syria.

Turkey-US relations have nosedived and Ankara often threatens US partners in Europe and stirs up problems, while US-Israel relations meanwhile have flourished. The Abraham Accords brought many benefits to Israel and also to US strategy in the region; including new partnerships with US Central Command and the Negev Summit.

US-Saudi relations are still a big question mark in this regard. When US President Joe Biden came to the region he visited Israel and Saudi Arabia. For some voices in the US there is a sense of betrayal, that Riyadh was supposed to do what the US wanted now that Biden had gone to the country. For others this is merely a foregone conclusion and self-fulfilling prophecy; they have opposed Riyadh for more than a decade, and some have opposed the current leadership in Riyadh since Mohammed Bin Salman rose to power and after the Khashoggi killing in 2018.

Without getting into all the details of these controversies, the point is that there are several foreign policy camps in Washington in regards to Saudi policy; those that want a close relationship with Saudi Arabia; those that want a transactional relationship; those who think Riyadh must do what the US wants or be jettisoned; and those who dislike Riyadh intensely; either its current leaders or the country in general.  


​​​​​​​Biden's gas gamble

Now let’s go back and look at what happened and how this could affect the region. Back in April the Biden administration and the US Department of Energy announced that it had awarded contracts for all of the initial 30 million barrels it put up for sale as part of President Biden’s Strategic Petroleum Reserve Release. The White House said, “these barrels will be delivered in May and June, and are the first US sale in the largest release from reserves from both the United States and the rest of the world in history. Together, these releases will put more than one million barrels per day on the market over the next six months, and will help address supply disruptions caused by Putin’s further invasion of Ukraine and the price hike that Americans are facing at the pump.”

By July, the US was selling an additional 20 million barrels from the reserve. Republicans in Congress have expressed concern that the reserve has now fallen from some 650 million barrels to some 450 million, according to reports. It’s apparently even less than that now; although the White House doesn’t want more releases than the 180 million barrels it authorized.  
 

 A model of 3D printed oil barrels is seen in front of displayed stock graph going down in this illustration taken, December 1, 2021. (credit: REUTERS/DADO RUVIC/ILLUSTRATION/FILE PHOTO)
A model of 3D printed oil barrels is seen in front of displayed stock graph going down in this illustration taken, December 1, 2021. (credit: REUTERS/DADO RUVIC/ILLUSTRATION/FILE PHOTO)


With that in mind, the US administration was gambling that OPEC would not cut production, because there is a clear window from September to the November elections when the reserve isn’t supposed to continue keeping prices low. Oil is often influenced by futures, meaning traders buy financial instruments linked to the future price of oil, depending on what people think that might be.

In April 2020 oil futures fell below zero dollars, meaning in some ironic imaginary way that only works in financial markets, people were ostensibly being paid to get oil for free. That’s not what happened in practice, but the point is that oil fell to historic lows. Two years later with the war in Ukraine the opposite was happening; oil was going through the roof.  

But it’s not all bad news. Oil prices have retreated a bit depending on some other issues, such as demand issues in China. In fact, a month ago, CNBC reported that oil slid to a seven-month low on concerns about China. But that hasn’t helped enough, the Biden administration wants prices down, below 3 or 4 dollars a gallon. Meanwhile, prices went up due to tensions in Iraq and an oil spill in Basra. Iran’s recent attacks on Iraq haven’t helped; nor has political chaos in Baghdad and fighting between tribes and militants in Basra. This means that the OPEC price cut may increase the price in the near term; but overall there are many places countries can go to seek oil production, beyond OPEC.  


 

Author: Editors Desk

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