Saudis, OPEC Emerge as Losers from New Oil Deal

The oil-price war between Russia and Saudi Arabia has at least temporarily come to an end.

Saudi Arabia, Russia and the U.S. agreed to lead a multinational coalition in major oil-production cuts after a drop in demand due to the coronavirus crisis and a Saudi-Russian feud devastated oil prices. The deal, sealed Sunday, came after President Trump intervened to help resolve a Saudi-Mexico standoff that jeopardized the broader pact.

As part of the agreement, 23 countries committed to withhold collectively 9.7 million barrels a day of oil from global markets. The deal, designed to address a mounting oil glut resulting from the pandemic’s erosion of demand, seeks to withhold a record amount of crude from markets—over 13% of world production. The U.S. has never been so active in forging a pact like this.

Mr. Trump, on Twitter, said the deal will “save hundreds of thousands of energy jobs in the United States,” and he thanked the Russian and Saudi Arabian leaders for their cooperation.

Trump will get no credit for this, of course, but he also had no choice but to intervene. The rebirth of the American oil industry has been a cornerstone of the formerly booming economy under this president, and a vivid reproach to his predecessor's gleeful defeatism.

The Left, however, has seen the price war as (curiously) a good thing, hoping it will cause the collapse of the energy industry and thus allow them to continue to peddle their "green" snake oil. The stabilization of prices is meant to tightrope-walk the line between cheap gasoline and the maintenance of jobs in the oil fields of North America; under the terms of the deal, the U.S. will maintain production at current levels. With the Wuhan virus currently keeping the western world confined to quarters, demand for oil has fallen precipitously, but should Europe, Canada, and the U.S. return to normal soon, the summer driving season could be a record-breaker.

The deal is slated to take effect on May 1. What effect the deal will have on prices remains to be seen:

After a week-long marathon of bilateral calls and video conferences of ministers from the OPEC+ alliance and the Group of 20 nations, an agreement finally emerged to tackle the impact of the pandemic on oil demand. Prices rose about 1% to around $32 a barrel in London after swinging wildly in the first few minutes of trading following the deal. The focus now shifts to whether the cut will be enough to dent the massive glut that keeps growing as the virus shuts down the global economy.

The talks had almost fallen apart late last week -- amid resistance from Mexico -- but came back from the brink after a weekend of urgent diplomacy. President Donald Trump intervened, helping broker the final compromise. “Unprecedented measures for unprecedented times,”said Ed Morse, a veteran oil watcher who is head of commodities research at Citigroup Inc. “Unprecedented in historical discussions of production cuts, the U.S. played a critical role in brokering between Saudi Arabia and Russia for the new OPEC+ accord.”

OPEC+ will cut 9.7 million barrels a day -- just below the initial proposal of 10 million.

“OPEC+ started the fire, and it was their responsibility to put it out,” Jason Kenney, the premier of Alberta, Canada’s biggest oil-producing province, said in a Twitter post. “Many challenging months ahead with very low demand and huge inventories, but at least now there is path to recovery.”

In the long run, breaking OPEC will continue to be a key tenet of American foreign policy, but thanks to the boom of the past three years, the Arabs and their allies can longer hold the industrialized world hostage with their monopolistic control of the oil fields. Already, the Mexicans are beginning to edge toward the exit. Another geopolitical upside has been the souring of the Russian-Saudi alliance, as the price war drove a wedge between Vladimir Putin (who relies on strong oil prices to keep his country, and his regime, afloat) and the Saudi ruling family.

Since 2016, oil has constituted the core of the deepening Saudi–Russia relations. Riyadh and Moscow have been coordinating under the umbrella of OPEC+ to stabilize the oil market and keep the oil prices at beneficial levels. In December 2019, the Saudi oil minister envisioned that OPEC’s deal to curb oil production with non-OPEC allies, including Russia, would stand the test of time, and remain steadfast “until death do us apart”. Three months later, Riyadh and Moscow waged an oil war against each other resulting in the sharpest drop in oil prices in around two decades.

The impact of the oil war on Saudi foreign policy is obvious. Feeling the pain of the low oil prices and the high costs of their regional adventures, the Saudis seem to be constrained now more than ever. Their priorities are shifting, and because of the pandemic and the oil war, they need to inject a lot of money in the domestic arena. Last week, Riyadh decided to announce a unilateral ceasefire in Yemen.

Who says there's never any good news?

The Return of Cheap Oil: Blessing or Curse?

Amid all the bad news of late, one trend that in earlier times would have gladden the heart of the driving public is the plunge in oil prices, both by the barrel and at the pump. Baby Boomers happily recall the days of 50-cent a gallon gasoline, and even the once-unthinkable dollar-per-gallon prices of the late '80s and early '90s seem remarkably cheap in retrospect. Even when gasoline prices in California soared into the $5-6 range at the end of the Bush administration, it seemed like there was still nowhere to go but up.

Now, however, they're dropping again, with a national average below $2/gallon. A perfect storm of events has hit the oil industry, most obviously the international shutdown of much trade and commerce and the questionably constitutional orders by state governors restricting public events and travel in defiance of the First Amendment's guarantee of freedom of religion and assembly, in the wake of corona virus pandemic. Throw in as well the ongoing price war between Saudi Arabia and and Russia, with each trying to drive the other out of the marketplace and seriously wounding domestic American oil producers as they fight it out, and you have a very rocky time for the energy industry.

Wait -- it's worse than you think:

Saudi Arabia’s recent decision to crank up oil production represents a dramatic shift in its thinking about energy markets and its own reliance on oil revenues. Gone are the days when Saudi oil reserves were prudently managed for future generations. By no longer maintaining a specific oil-price band or retaining spare production capacity, the Kingdom is stepping away from its longstanding role as the market’s swing producer.

The change reflects Crown Prince Mohammed bin Salman’s (MBS) view that Saudi Arabia has a relatively narrow window of opportunity to monetize its large oil reserves. He has embarked on a policy of capturing market share rather than trying to set the price, once again breaking with longstanding policies that he believes are no longer useful.

Why would the Saudis do that? Since the Arab oil embargo of 1973, which was directed at the West and in particular the United States, for supporting Israel during the Yom Kippur War that year, the Saudis have enjoyed lording it over the infidels and making them dance like marionettes as they manipulated the market. Now, they're doing it again.

If MBS persists with this strategy, he could significantly alter the dynamics of global energy markets. By keeping prices depressed, Saudi policy will not just drive more expensive forms of oil production out of the market; it will also make it harder for renewable energy to compete with fossil fuels – at least in the near term.

The source of this linked article is Project Syndicate, a radical leftist internet publication masquerading as "the World's Opinion Page," based in Prague, funded in part by George Soros' Open Society Foundations and the Bill and Melinda Gates Foundation, and one notoriously sympathetic to Islam. If you read its columns and every day and follow on Twitter something called The Bridge Initiative, a "multi-year research project on Islamophobia" disgracefully based at once-Catholic Georgetown University, you'll have a pretty fair idea of what Islam and its western enablers are up to.

The new strategy became clear on March 7, a Saturday, when Saudi Arabia decided to cut its official selling price and increase its oil production to above ten million barrels per day, with output in April likely to be near 11 million, up from 9.7 million in recent months. When markets reopened the following Monday, oil prices suffered their largest single-day decline since 1991.

Officially, the Saudi action was a response to Russia’s refusal to agree to voluntary oil production cuts at an OPEC+ meeting on March 6. Since 2016, the Russians and the Saudis have been coordinating their production to keep prices elevated at around $50-$60 per barrel. Yet the net effect of this cooperation has been to help the US shale industry boost its own production and sales, thereby capturing most of the world’s incremental demand. Having suffered declining exports since 2016, the Saudis were probably hoping that a reduction in output would shore up prices at a time of weakening global demand, owing to the coronavirus outbreak.

That "probably" is a nice touch. But of broader interest is the notion that "MBS" is actually looking toward a "renewable energy" future, and is trying to cash out now -- and ruin two of his chief competitors -- while the cashing's still good. This presupposes that the "Green revolution" is actually going to take place, something whose odds suddenly look much longer in the wake of the coronavirus and the Chinese culpability in its release.

There are strong arguments for why the Kingdom should pursue this path. For starters, Saudi oil is cheaper to extract and transport than many other reserves. It is also “cleaner” than that produced by Canada’s tar sands, and emits little methane compared to Russian oil. And Saudi Aramco is one of the world’s most technologically advanced and technically competent oil companies. In other words, Saudi oil has multiple comparative advantages over the competition, and therefore is perfectly placed to hold a privileged position in the global clean-energy transition.

In other words, under the guise of "clean" energy, which serves to keep the global-warming nuts at bay, the Saudis are actually pursuing a beggar-thy-neighbor strategy against its two chief antagonists, countries that also serve in Muslim eyes as archetypes of their religious enemies: the still-Christian U.S.A. and Orthodox Russia, the "Third Rome" that traces its spiritual descent directly from Rome and occupied Constantinople. This basically gives the game away:

The Kingdom’s policy shift should give pause to American politicians who boast that the United States has achieved energy independence through shale. In an all-out war for market share, US, Canadian, Russian, and other oil producers will have a hard time competing with the Gulf, given its lower costs and other competitive advantages... MBS may be gambling that he can outlast the competition. But given the structural features of the oil market and the world’s inevitable transition to renewables, he probably sees no other alternative. OPEC quotas and production agreements with the Russians have not delivered the results he needs.

So first we lose a price war with the Arabs, then the entire industry collapses as it "transitions" to unicorn farts and bird-annihilating windmills. That's the future, according to our friends the Saudis. It's up to us to make sure it doesn't happen that way.