About the Author: greg priddy is an independent consultant on global geopolitical risk based near Washington, DC
OPEC+ will meet on Thursday amid the war in Ukraine and associated sanctions, which have slashed Russian exports of crude and petroleum products. But the meeting of the oil cartel and its allies will probably only result in a continuation of monthly quota increases of 400,000 barrels a day, less than half of which is from countries that actually have unused capacity. That result is a radical departure from a fundamental assumption underpinning US relations with Saudi Arabia and the United Arab Emirates: that they would use available spare capacity to help offset volume losses elsewhere when the global oil market oil will face a genuine crisis, as it does now. .
Saudi Arabia and the United Arab Emirates have chosen to severely weaken their ties with Washington. They are explicitly linking a threat to withhold production increases to demands for changes in US policy on other issues in the Middle East. In the process, they are driving a wave of inflation in the US and elsewhere. In their dealings with the US, the Saudis in particular have often suggested that maintaining spare capacity provides a global public good. They have used that ability to calm the market even when they disagreed with US policies, such as dramatically increasing supply in early 2003 as the US prepared to topple Saddam Hussein. It is not so now.
TO statement on March 9 by Yousef Al Otaiba, the Emirati ambassador to the US, initially hinted at an accelerated increase in production and led to a sharp market correction. That position quickly changed. The two governments apparently signaled authorized leaks in various prominent media outlets and opinion pieces by pro-Saudi commentators that both Saudi Arabia and the United Arab Emirates want to use the current oil shortage to force the US to make a series of political concessions. Their demands include increased US military and intelligence support for their war in Yemen, that President Biden back down on his goal of negotiating a restoration of the 2015 nuclear deal with Iran, and that the president deal directly with the crown prince. Mohammad bin Salman. In particular, the two governments demand that the US reinstate its designation of the Houthi movement as a terrorist organization. The Houthis have fought Saudi Arabia and the United Arab Emirates in their war in Yemen. The Trump administration added the Houthis to the terrorist list, but Biden lifted the designation in 2021 and has been unwilling to reinstate it in part because of concerns it would impede humanitarian aid to alleviate famine in parts of Yemen.
While pro-Saudi and UAE sources have said the Biden administration appears to be preparing to make concessions Faced with soaring oil prices, the administration is unlikely to budge, except perhaps on the token issue of Biden dealing directly with MBS, as the crown prince is known. Biden has not spoken directly with MBS since he took office. Tellingly, the source of the press coverage suggesting that the US will make concessions appears to come from people on the Saudi/UAE side, with no senior US official confirming any of this narrative. It is also revealing that Secretary of State Antony Blinken is visiting only two Arab countries on his current trip abroad, Morocco and Algeria, after it was widely reported in early March that he was considering visiting Saudi Arabia and the United Arab Emirates.
This media pressure campaign is heavy-handed, and the demands of the two Arab governments are not trivial. But they are unlikely to turn to China and Russia, as the narrative suggests. China plays both sides in the Gulf and has shown no interest in abandoning its ties with Iran, or selling its best military technology, such as the fifth-generation J-20 stealth fighter. Russia is immolating itself before our eyes, weakening itself as a major energy and military power.
For financial markets, the most likely outcome is a continued tightening of the global oil market as China and India buy only a small proportion of the supplies now banned by US sanctions and rejected by many refiners. both in Europe and Asia, except -China. The market will have to find a price level that reduces the demand for a price inelastic good. For Saudi Arabia and the United Arab Emirates, despite their reliance on the US for military hardware and services, the Biden administration is unlikely to directly exploit those vulnerabilities. And if this tactic fails, they will have severely weakened their relations with the United States and Europe. It has always been recognized that the West does not share common values with these absolute monarchies. If they are no longer willing to be reliable energy partners, why should the West offer them support?
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