United States, Saudi Arabia and Russia Find Agreement on Oil Policy

Posted On: June 14, 2018

7 minutes read

It is unusual for the United States, Saudi Arabia and Russia to see eye-to-eye, much less try to achieve common energy policy goals, even indirectly.

But that is what seems to be happening, and it is taking the edge off the yearlong rise in oil and gasoline prices. Even if those countries have their own reasons for welcoming the surge in production, it is also reducing the influence of the Organization of the Petroleum Exporting Countries, which will meet in Vienna next week to discuss production cuts put in place in early 2017.

The cheerleader, if not the ringmaster, in this effort is President Trump, who took to Twitter on Wednesday to criticize OPEC for high crude prices. “Oil prices are too high, OPEC is at it again,” he wrote in his second such statement since April. “Not good.”

Whatever happens at the OPEC meeting, two of the biggest players in the global oil market — Saudi Arabia and Russia — appear to have already calculated that it is in their immediate interest to crank up production, effectively sidelining the Saudis’ fellow cartel members.

Between them, the two countries have already each added more than 100,000 barrels a day to global oil supplies. Mr. Trump wants even more crude sloshing around the market to tamp down energy prices ahead of the congressional elections in November, and it looks like he may well get it.

It is perfectly normal for Republican and Democratic administrations to try to nudge oil prices down, but rarely — if ever — has the effort been so blunt and public. For decades, whenever presidents faced rising gasoline prices, American officials privately called Saudi Arabia seeking help in getting OPEC to boost production — something that the Trump administration has done, as well.

But Mr. Trump appears unsatisfied with limiting his overtures to private diplomacy. He is publicly targeting OPEC even though oil prices have stabilized since his criticism in April, and regular gasoline prices have slid by roughly a nickel a gallon since Memorial Day. A barrel of oil in the United States now costs about $67 a barrel, down nearly $4 over the past month, although that is still about 45 percent higher than at this time last year.

Saudi oil officials have agreed to boost production publicly, in coordination with Russian officials who would like to export more oil to bolster the country’s economy. That may well upset Iran, Venezuela and other OPEC members that want higher oil prices, making the coming meeting a contentious one.

President Vladimir V. Putin of Russia and Saudi Arabia’s Crown Prince Mohammed bin Salman will discuss oil and other issues on Thursday as their teams face off in the World Cup. The stars appear to be aligned for them to work together to keep oil prices from climbing too high, too fast, despite the collapse of Venezuelan crude production and the expectation that new American sanctions will target Iranian oil exports.

“There’s a commonality of interest that fortunately and coincidentally came together,” said Larry Goldstein, a director of the Energy Policy Research Foundation. “Putin is under pressure domestically to export more oil, the Saudis got a little nervous when the Brent price hit $80 a barrel, and the U.S. is nervous about their Iranian policy and the possibility of soaring gasoline prices.”

The result has been a partial reversal in energy prices, which should cheer elected leaders and economists who worry that high energy prices could hurt global economic growth.

But whatever the advantages for consumers and American foreign policy, oil price relief could be modest and short-lived.

Mr. Trump, for instance, is pursuing several policy goals that cut against each other. He wants lower gasoline prices to keep the economy humming. At the same time, he wants to squeeze Iran and Venezuela with sanctions, which would inevitably lower the amount of oil on the world market. Venezuela’s oil exports are falling by tens of thousands of barrels every month, and Iranian exports could fall by between 200,000 and a million barrels a day by next year, analysts say.

A boom in oil production in the United States has helped increase global supplies in recent years even as OPEC countries cut back to raise prices. But experts believe a shortage of pipelines will limit the amount of oil that companies can extract from the Permian basin of West Texas and New Mexico, the main source of new American production, until late 2019.

Scott D. Sheffield, chairman of Pioneer Natural Resources, a major Texas oil producer, said if there were a significant decline in Venezuelan and Iranian exports, “and Saudi doesn’t increase output, we’re going to see $100 oil by the end of the year.”

Just a few years ago, $100 a barrel was considered normal. But prices collapsed in 2014, falling in the United States to below $30 in early 2016, as a glut of oil filled up tankers. Now the world’s big oil producers are seeking a sweet spot for oil prices.

American and global oil prices rose modestly on Wednesday despite Mr. Trump’s criticism.

Even as he has criticized OPEC, Mr. Trump has found a willing ally in Saudi Arabia. Riyadh has long argued against the Iran nuclear deal, and pressed the United States to put more pressure on the Shiite Islamic regime. The Saudis are fighting Houthi rebels backed by Iran in neighboring Yemen and have been trying to counter Iranian influence in Syria and elsewhere.

Iran would like higher oil prices, because it needs money to invest in its weakened oil industry and ailing economy. But its exports could falter with the return of sanctions that were removed under the nuclear deal. And other OPEC members will seek to take advantage of Iran’s misfortune by selling more oil to big markets like China and India.

“If you are the Saudis, you want to do Trump a favor and get him off your back,” said Robert McNally, president of Rapidan Energy Group, a consulting firm.

Sadad Ibrahim Al Husseini, a former executive vice president of Saudi Aramco, said Russian and Saudi Arabian leaders “will look at gradual but steady increases of overall supply, easily between one and 1.2 million barrels a day by year-end.”

The two countries will probably lobby other oil-producing nations to also raise output, particularly Kuwait and United Arab Emirates, both OPEC members.

Besides juicing economic growth, Russia has other reasons to export more oil.

Two years ago, Russia agreed to slash 300,000 barrels per day to help OPEC stabilize prices. But more recently, Rosneft and other Russian oil companies have been lobbying Mr. Putin to increase production to take advantage of higher prices and for tax reasons, energy experts say.

The Russian oil companies, increasingly active in Venezuela and the Middle East, have recently raised their production capacity. They also prefer lower prices because they pay higher marginal corporate tax rates when prices go above $75 a barrel.

“Russian firms have long been pushing to produce more,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. “They have invested heavily in new production capacity and see far more upside from additional production rather than higher prices.”

The Russians are aligned with Iran in Syria and support the Iran nuclear deal, but they stand to gain financially if the agreement falls apart. American sanctions clamping down on Iranian exports would allow Russia to buy Iranian oil cheaply and resell it at a higher prices. Russia might also replace European investors in Iranian oil fields.

Of course, over the long term, Russia and Saudi Arabia would prefer higher oil prices. But short-term considerations have held sway since Mr. Trump jabbed at OPEC in April.

Saudi and Russian officials expressed their preference for higher production levels after the president tweeted: “Oil prices are artificially Very High! No good and will not be accepted!”

Amy Myers Jaffe, an energy expert at the Council on Foreign Relations, said that the post caught the attention of oil-producing nations. “The tweet was critical and derailed the entire discussion heading into the OPEC meeting 100 percent,” she said.

Read the full article by Clifford Krauss on The New York Times, June 14, 2018.

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