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Oil prices and geopolitics

While the world has been focused on the fight against the Covid-19 pandemic, another battle has been playing out in the background, around oil prices and geopolitical interests, writes Saeed Okasha

Saeed Okasha, Tuesday 14 Apr 2020
Oil prices and geopolitics
Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman Al-Saud speaks via video link during a virtual emergency meeting of OPEC and non-OPEC countries, in Riyadh (photo: Reuters)
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The price war between OPEC states — led by Saudi Arabia — and Russia ended Sunday with an agreement to slash production in May to stop the collapse of oil prices. The landmark agreement came a day after a phone call between 13 US senators and the Saudi Ambassador to the US Princess Reema Bint Bandar Al-Saud, was leaked to the press.

In the phone call, that reportedly took place late last month, the senators threatened to push legislation calling for the withdrawal of US forces from Saudi Arabia, the imposition of customs duties on Saudi oil imports to the US and reducing the level of bilateral relations between Washington and Riyadh unless Saudi Arabia, one of the world’s largest oil exporters, stopped flooding markets to cause oil prices to plummet.

As forceful as the senators’ threat may have been, this was not what ultimately determined Riyadh’s decision to call for a truce in the price war in which Donald Trump had recently taken a lead as an intermediary. The crisis, which erupted in January, played out against a number of major developments that had no direct bearing on the recriminations traded at the time between Russia and Saudi Arabia over production and prices. Above all, there was a sharp rise in tensions between the US and Iran due to the former’s decisions to notch up sanctions and to assassinate Major General Qassem Suleimani, commander of the Iranian Revolutionary Guards’ Quds Force. The dramatic developments surrounding that crisis would have actually propelled towards a rise in oil prices, since the absence of Iranian oil from the market would reduce supply. However, Saudi Arabia stepped in to take up the slack and sustain price levels. This, in turn, angered Russia, another major oil and natural gas producer, which jacked up its oil production and exports for fear of losing its share of the global market to Saudi Arabia. With some more tit-for-tat measures, the price war was in full swing.

Then the second factor, Covid-19, struck, precipitating the worst global economic crisis since World War II. Due to the worldwide slowdown in economic activities as countries went into lockdown, demand for oil plunged, triggering a further collapse in prices.

Thus, contrary to the claims of some US senators, such as Dan Sullivan, Saudi Arabia was not directly responsible for this collapse. Sullivan, a Republican from Alaska, was among the 13 senators who took part in the abovementioned phone call to the Saudi ambassador which was unprecedented in its menacing tone, even if some of their threats would be difficult if not impossible to implement, such as the threat to withdraw US forces from the kingdom.

The phone call was motivated less by anti-Saudi sentiment than by concerns over US domestic oil production. Most of the 13 senators were from oil producing states such as Alaska and Louisiana. They are also connected with major lobbies related to oil, namely the gun lobby and the Jewish lobby. The three form the most powerful lobby triumvirate in the US.

President Trump, who was disinclined to exert too much pressure on the Saudi monarchy, adopted a softer approach. On Thursday last week he said that he had “a good conversation” lasting an hour and half with Russian President Vladimir Putin and Saudi Arabia’s King Salman in advance of the OPEC+ meeting. “We had a big talk as to oil production and OPEC and making it so that our industry does well and the oil industry does better than it’s doing right now,” he said, predicting an immanent deal.

The US president’s uncharacteristically mollifying tone, in contrast to the tougher rhetoric he generally prefers to use against friend and foe alike when defending US interests, reflects the complexity of this issue from his position. Trump’s immediate aim was clear: to push Moscow and Riyadh towards an agreement that would alleviate the global economic crisis and help floundering oil-related industries in the US survive the crisis. However, contrary to the US oil lobby’s representatives in the Senate, who saw the crisis exclusively from the perspective of its impact on their home states, Trump took a broader view. He also approached it from the perspective of the impact of oil prices on the US’s main adversaries, such as China, Russia and Iran.

As Trump realised, the plunge in oil prices naturally worked in favour of China, one of the world’s largest importers of this strategic commodity. Had it not been for the Covid-19 pandemic, China could have emerged from the price war more economically competitive than ever and with greater opportunities to increase its trade surplus with the US. This was the last thing Trump wanted at this point in his long battle to force China to stop flooding US markets with Chinese exports. On the other hand, the drop in oil prices helped put the squeeze on Russia, which Washington wants to punish for its policies towards Ukraine and Syria and its alliances with Iran and Turkey. So, when Riyadh initially initiated the production/price war with Russia, which is heavily dependent on petroleum exports, Trump understood that this was not directed against US interests and that it might serve to compel Russia to alter its policies in directions more in line with Washington’s outlooks. Plummeting oil prices also intensified Iran’s economic anguish. Despite US sanctions, Tehran has still managed to export oil indirectly through such intermediaries as China. However, it was forced to sell at less than the international rate in order to ensure a sufficient share of the market and compensate for losses. The Iranian economy, like Russia and the Gulf countries, is also heavily dependent on oil.

Basically, President Trump has had to strike a balance between three considerations. One is pressures from domestic shale oil producers who cannot continue production if the price of oil falls below $40/barrel. The second is advantages that lower oil prices bring in terms of the ability to pressure Russia and Iran to change their foreign policies in areas of concern to the US. The third is the desire to prevent China from capitalising on lower oil prices and driving up the US’s trade deficit with China. Because of the interplay between these three considerations, Trump did not share the anger that the 13 senators vented against the Saudi ambassador. At the same time, he welcomed the Saudi-Russian agreement to end the price war so that he could focus on the greater challenge: the anticipated impacts of the Covid-19 pandemic on the US economy for quite a while to come.

*A version of this article appears in print in the  16 April, 2020 edition of Al-Ahram Weekly

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