Trump’s tweet for oil and Saudi Arabia’s OPEC diplomacy

Trump’s tweet for oil and Saudi Arabia’s OPEC diplomacy

Once again the US President Donald Trump’s penchant for policy-making by Twitter has raised questions regarding clarity.

The president tweeted on Saturday about a phone call with King Salman of Saudi Arabia, in which Trump had asked the king to pump an extra 2 million barrels of oil per day because the price of crude was “to (sic) high.” Guess what? “He agreed!” Trump exclaimed.

That was not exactly how the Kingdom — nor the White House — recalled the conversation, and the White House later concurred with the view from Riyadh. “King Salman affirmed that the Kingdom maintains a 2 million barrel per day (bpd) spare capacity, which it will prudently use if and when necessary to ensure market balance,” a later statement said.

See the difference? It is one thing to say that, as the biggest oil exporter in the world with some of the most advanced hydrocarbon technology on the planet at Saudi Aramco, you could crank up output in the long term, if needed. It very different to suggest, as Trump did, that the pumps could be left open with immediate effect.

But leaving aside the question of who said what, the episode offers a revealing insight into the state of US-Saudi relations, as well as a pointer to how things stand in the global energy market.

Saudi Arabia is a historic ally of the US and will go far in supporting it. However, oil is the lifeblood of the Saudi economy and the staple of its public finances, so anything that significantly affects the global price of crude — as a 20 percent increase in output certainly would — would have to be weighed very carefully in Riyadh, and some good reasons provided.

Trump’s rationale for the request was “the turmoil and disfunction in Venezuela and Iran,” which together threaten to create an acute shortfall in global oil output.

He was right to identify those two countries as the main concerns in global oil markets, but they are not directly comparable. Venezuela is nearing record lows in output mainly because of the ongoing chaos presided over by its socialist government; Iran’s problems lie in the future, when full US sanctions bite in the autumn because of the impasse over Tehran’s nuclear ambitions.

Saudi Arabia is a historic ally of the US and will go far in supporting it. However, oil is the lifeblood of the Saudi economy and the staple of its public finances, so anything that significantly affects the global price of crude would have to be weighed very carefully in Riyadh.

Frank Kane

Iran can produce plenty of oil, but will find it — as it should, being a terror-sponsoring state — increasingly difficult to sell it, at least to traditional customers in the West.

What Trump probably did not mention in his phone call were some very particular factors relating the US at this time of year: Peak summer consumption of energy, gasoline prices around $3 a gallon, businesses’ increasing concern about high energy prices, and mid-term congressional elections a few months away.

So the US president’s call to Riyadh was prompted at least in part to seek Saudi backing for his foreign policy toward Iran, and to help him through a tricky patch in the electoral cycle. You might imagine Saudi Arabia would likely be more cooperative on the former than the latter.

Oil analysts highlighted another aspect of Trump’s Twitter statement: It showed that, for all his bravado about the “great” American oil industry, when it comes to a real impact on global prices, the president looked to the traditional “swing” producer, Saudi Arabia, for immediate results.

Why didn’t he ask the roughnecks of the Permian Basin in Texas to make up the coming global shortfall? Because, for all their technological knowhow and production power, the oil men of Texas are seriously constrained in how much crude they can actually get to the world’s markets. They just do not have the pipelines.

Can the Kingdom help Trump out? It undoubtedly has the capacity, according to the International Energy Agency, which recently estimated maximum potential output of 12.04 million bpd, compared with an average of 10 million bpd pumped in May.

But experts said that pumping 12 million bpd would eat into reserves at a dangerous rate, could only be sustained for a short period, and would have to be reached gradually. It’s just not as simple as implied by “he agreed!”

There are also persuasive geopolitical reasons why Saudi Arabia would not want to change output levels at the moment. As the leader of the Organization of the Petroleum Exporting Countries (OPEC), it has just got through a very complex and high-risk session in Vienna, where all its diplomatic skills were used to persuade OPEC and non-OPEC states (principally Russia) to agree a gentle upward movement in global oil supplies, mainly by easing individual compliance targets.

If the Kingdom were now to agree a massive 20 percent hike in its own output, it would effectively signal its withdrawal from that agreement, and maybe from OPEC all together. The long-term strategy of a Saudi-Russia alliance would be in tatters.

Why would Saudi Arabia risk all of this? There may be valid reasons, and trade-offs that might be expected in return for Saudi support, but no convincing ones spring immediately to mind.

  • Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai
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