Thumbing Nose at US, Saudi Cuts Oil production, Helping Russian War Effort, as Maduro Visits Riyadh

Ann Arbor (Informed Comment) – Crown Prince Mohammed Bin Salman (MBS) of Saudi Arabia has taken several steps sure to annoy Washington in just the past week. Iran has reopened its embassy in Riyadh. Venezuelan President Nicolás Maduro Moros has come for a visit to the kingdom just before US Secretary of State Antony Blinken’s planned visit later this week for a conference on combating extremism.

And for the pièce de résistance, at the OPEC+ meeting in Vienna this weekend, Saudi Arabia announced that it would cut oil production again, down to 9 million barrels a day from the 10 it has been producing during the past year, as of July 1. Moreover, the Saudis struck a deal with OPEC+ members collectively to take 4.6 million barrels a day off the market at the same time, which is a shortfall of 4.6% of current world production, which stands at about 100 million barrels a day. The Saudi oil minister called the move a “sweet lollipop” for oil prices.

This move has the perhaps inadvertent effect of causing traders who shorted oil to take a bath.

The Biden administration wanted Saudi Arabia, the world’s swing oil exporter, to expand production so as to flood the market, send prices down, and bankrupt the Russian Federation of Vladimir Putin. That step would potentially make it difficult for Moscow to pursue the war with Ukraine.

Instead, MBS has given Putin an early birthday present, of possibly higher prices. The announcement of the Saudi decision produced a flutter in the oil markets Monday but then the price fizzled toward the end of the day, ending at $75.06 a barrel at the Brent Crude exchange.

Ironically, Russia could be undermining the Saudi attempt to support a higher price for petroleum by producing more than its OPEC+ quota, which has allegedly angered Riyadh. So reports Matthew Fox at Business Insider. Indeed, possibly the further cut in Saudi production had to be taken to prevent a price slide because of Russia’s desperate profligacy. Saudi Arabia needs oil to sell at about $81 a barrel in order for it to enact the massive reforms envisioned by Bin Salman and move to a post-oil economy.

Saudi Arabia’s urgent need for cash to transform its society in preparation for the end of oil some 15 to 20 years from now is thus in stark contradiction with the US preference for low oil prices, to hurt Russia and to help the American consumer.

Worse, the fix that Saudi Arabia is in, of having to find a whole new economic model, is created in part by President Biden’s subsidies for green energy and electric cars in the Inflation Reduction Act. The industrialized democracies are gradually coming to grips with the dilemma that burning fossil fuels is causing them enormous damage, which will only increase unless they stop.

So from a Saudi point of view, Biden is hobbling the country’s future and then is turning around and asking Saudis to accept lower proceeds now, when demand is still high. Saudi Arabia has huge lakes of a stranded asset, petroleum, under the ground in the Eastern Province, which is black gold today but which may be virtually worthless in 2040. So Riyadh sees it as a no-brainer to sell as much of the stuff as it can at the highest price it can get before the whole bonanza shrivels up and blows away.

The Saudis have declared independence of US foreign policy. The reopening of the Iranian embassy in a deal brokered by Xi Jinping of China is part of that declaration. As for Maduro’s visit, its purpose was not announced, but it certainly annoyed Washington, which sees the Venezuelan leader as illegitimate and as an anti-American leftist.

The US and Saudi Arabia were on the same page from 1945 until about 2015. Since then, their geopolitical and economic interests have increasingly diverged. This week’s flurry of news is a further sign of this slow-motion divorce.