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Analysis | There is a $15 solution to the US-Saudi oil feud

Remark

The relationship between Washington and Riyadh has reached the stage where Saudi Arabian officials are giving TV interviews to say how good it is.

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

Among these conflicting goals, however, may be a piece of common ground. A month ago, the White House announced a plan to top up the SPR when oil prices fell to $67-$72 a barrel. By creating an effective market launch, the idea is to encourage domestic producers to drill for more oil. Meanwhile, with its dramatic cut, OPEC+ also tried to put a bottom under a price that had fallen from over $120 in June to about $85 when the meeting took place.

That points to a bottom of about $70 for the US and a bottom of about $85 for Saudi Arabia and its Viennese entourage. The $15 difference looks like a pretty narrow gap to bridge.

At first glance, the two countries are coming from very different directions: American politicians like low oil prices, while Saudi princes depend on high ones. But there are nuances. If oil prices fall too low, the US oil industry, the largest in the world, will also suffer. That jeopardizes production and a backlash in the states that host the industry. Even Saudi Arabia, despite competing with the frackers, should not want to crush them: they are a bulwark against a more ambitious energy transition policy in the US. Meanwhile, although Riyadh’s treasury overflows when oil prices rise, the associated inflation and volatility risk a recession and intensified efforts to move away from 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. On that basis, a market where Riyadh knows Washington would release strategic barrels when the price hits, say, $100, but buy them back when it drops to, say, $75 — and where Riyadh also works to maintain that bond — would have a more stable relationship. .

The emergence of the US as an active manager of the oil market would mean a sea change. The world’s largest consumer of oil has been a price taker since the 1970s and the SPR is effectively considered dead oil, used only in the most appalling conditions. However, the SPR was set up in the context of price controls, which, due to their disruptive effect, actually encouraged physical shortages. Today, with oil being priced by the market, it is not so much the prospect of emptying pumps that threaten the US economy as what happens to the price of those pumps as supply and demand tighten.

To watch Russia invade Ukraine and withhold energy supplies, oil rise to $120 and OPEC+ unable or unwilling to close the gap, and then smell that the SPR should be reserved for emergencies is an absurdly scary way define an emergency. Did Biden have the midterm elections in mind as gasoline raced to $5 a gallon? Naturally. Nevertheless, real supply shocks threatened our economic well-being.

Ed Morse, Citigroup Inc.’s global chief of raw materials research, estimated in a recent report that the world’s commercial stockpiles of oil and barrels in transit increased by 273 million barrels this year through October, versus 239 million barrels released from strategic stockpiles. , mainly from the US. In other words, that transfer of state-controlled oil – usually ignored by the market – provided a significant boost to the commercial stocks viewed by traders, easing the panic.

When Prince Abdulaziz bin Salman, Saudi energy minister, recently denounced buffer stocks being used to “manipulate markets,” he not only drowned irony in a barrel of crude oil, but seemingly ignored how much the world has changed. The US has moved from the largest net importer of oil to the largest producer and a (small) net exporter. Moreover, it will not escape any American politician that Biden’s intervention may have helped the Democrats break the interim curse. Just as China is beginning to test its own strategic reserves as a tool to curb inflation, Saudi Arabia should consider making the SPR a permanent participant.

However, the US should equally recognize 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 Washington’s oil-for-security deal (see this). In the past two decades, the US has not only become a major oil producer again, but its commitment to post-war security arrangements and globalization seems to have waned. While Biden’s antipathy towards Riyadh is quite overt, don’t forget that despite the glowing diplomacy in Riyadh, his predecessor stood his ground after an unprecedented and likely Iranian-led drone attack on critical Saudi oil infrastructure in 2019.

In a recent illuminating essay for State Department, Karen Young of Columbia University’s Center on Global Energy Policy argues that Saudi Arabia, which is disintegrating the old order and accelerating global action on climate change, is seeking to use its oil-derived power and wealth as long as it takes. Not only does it need money to pay its bills and diversify its economy, it also seeks to use its oil power to develop a non-aligned foreign policy that is less dependent on a distant superpower. At that reading, Washington’s anger at the pre-midterms timing of that OPEC+ supply cut was only to be expected, while Saudi Arabia was only protecting its own interests by halting a decline in its oil revenues.

Despite the huge challenges – and ongoing disagreements – the US should support Riyadh’s efforts to overhaul its economy. Despite all the newfound dreams of energy independence amid the shale boom, the US and its allies remain entangled in the global oil market. While the SPR is a powerful tool, it is ultimately a finite supply of oil that pales in comparison to Saudi Arabia’s flow of 11 million barrels per day. Similarly, 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 – versus the House of Saud’s actual open time stream. An agreement to work in tandem, rather than at odds, on an oil price link that will allow Riyadh to balance its books is in the US interest.

That extends to the problem that seems to have irreconcilable differences: climate change. The passage of far-reaching federal climate legislation this summer pushes the US further toward the decarbonization that poses an existential threat to Saudi Arabia’s economic model.

But the massive turnover in fixed assets and behaviors required for the energy transition means it will be anything but smooth. Even under ambitious green scenarios, there will be a need for a reliable supply of conventional fuel to power the existing system for years to come (see this). As the Democrats’ obvious pump price fears demonstrate, keeping the cost of those conventional fuels stable amidst the disruption of change is vital if the green agenda is not to be derailed by the nasty politics of inflation. A well in the oil market backed by SPR purchases could help US producers – and, more importantly, their investors – cross the threshold to start drilling again in an uncertain world.

Similarly, just as Saudi Arabia accepts that US geopolitical priorities are shifting, 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 be a useful tool to manage the transition from an economic perspective. As much as their vision of the future differs, both countries could use a stable oil market to get there. More from Bloomberg Opinion:

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

• A permanent rift between the US and Saudis? Check out these 3 events: Hussein Ibish

• What a ‘Saudi First’ policy means for oil and energy: Javier Blas

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This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist on energy and resources. A former investment banker, he was an editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’ Lex column.

More stories like this are available at bloomberg.com/opinion

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