Will an apparent Saudi concession on oil production drop US prices at the pump?
“President Biden blinked” could have been the headline on a story in today’s Financial Times. But it wasn’t. Instead the sub-editor went for the somber, British-style capital letter-averse “Opec+ sticks with oil supply increase after US overture to Saudis.”
Nevertheless, the story highlights realpolitik with COVID-era urgency and commodity pricing. Thursday started with a meeting of OPEC+, the super-cartel made up of Saudi-led OPEC and Russia-led other major oil exporters. What would they do, given the omicron COVID-variant uncertainty, combined with a vulnerable though high oil price (plus or minus $70 per barrel depending on the grade)? The initial announcement of deciding to continue to increase slightly OPEC+ production volumes, a potentially price-easing measure, was perceived as sagacious, an indication of the wisdom and experience of oil ministers, with the experience to really understand what the market would bear.
The reality, at least according to the Financial Times, is that the U.S. side effectively pleaded with the Saudis for a concession on prices, which have been a domestic embarrassment to President Biden. And they got it. The newspaper described it as “charm offensive by Biden administration officials.” It turns out that a U.S. delegation had been in the kingdom, comprising Daleep Singh, deputy national security adviser for international economics, Don Graves, deputy Commerce secretary, and Amos Hochstein, the senior adviser for global energy security at the State Department.
The meeting went “very well,” according to the FT, citing unnamed officials who insisted there was no quid pro quo “involved in the effort to warm ties and reframe the U.S.-Saudi relationship around economics and energy.” Hochstein, the FT reported, had lengthy meetings with Prince Abdulaziz bin Salman, the Saudi oil minister, who is a son of the king but more significantly an older half-brother of Crown Prince Mohammed bin Salman. Despite his relative youth and inexperience, MbS, as the crown prince is known, has a more powerful role, by orders of magnitude in all matters including oil-related decisions, than his older sibling, but seems to recognize the oil minister’s experience and grasp of details.
While the issues may seem banal — even opaque, to most of us — the decision-making is probably indicative of how differences, even between supposed allies, are resolved. It’s not softball; it’s hardball.
For example, a week earlier, the United Arab Emirates (UAE), Israel and Jordan had been due to announce a significant energy agreement. The oil-rich UAE would have bought a solar-power plant for Jordan, the electricity from which would have been used to desalinate water from Israel’s Mediterranean coast, to supply Jordanian cities, including the capital, Amman. But, as announced, the agreement had become merely a letter of intent with a feasibility study to be conducted in 2022. According to insiders, the Saudis, irritated with being sidelined by the UAE, which has achieved celebrity status through its peace accord with Israel, had demanded a watering-down (if that is the right expression) of the breakthrough/sustainability/normalization desalination project.
As it is, the Saudi concession on increasing oil production levels wasn’t that generous. An extra 400,000 barrels a day had been sort of promised, the same as earlier increments. But some OPEC members had not been able to take advantage of their allowances because of technical limitations. So, Saudi Arabia had some wiggle room to make what was essentially an accounting adjustment.
But the increase was the target for the American envoys in Riyadh — anything to bring down prices at the pump and stop bad publicity. The front page of the Business and Finance section of the Wall Street Journal on Dec. 1 had a graphic of “Average gas price by state, change from a year earlier.” Indiana topped the chart with a whopping 69 percent. The average for the U.S. was around 60 percent.
The big question now is whether the Saudis think there was a quid pro quo for their decision — even if the Americans don’t think there was one. MbS supposedly doesn’t like being ignored by President Biden, who is believed to hold him in contempt for the murder of dissident journalist and Washington Post columnist Jamal Khashoggi. And what about the other OPEC+ heavyweight, Russian President Vladimir Putin, who is not known for his generosity of spirit?
For the moment, though, the White House probably hopes they have sidelined the oil price issue. But for how long?