The sharp increase in oil prices following the Ukraine war brought President Biden to Saudi Arabia. This was seen as a departure from the position taken by candidate Biden during his election campaign when he had criticized the Crown Prince and threatened to make the Saudi Kingdom a pariah state. The Crown Prince promised an increase in production. But the increase of 1,00,000 barrels per day announced subsequently by OPEC +^[1] was rather disappointing. It was the smallest increase by that grouping in recent years. Despite, the underwhelming response to US President’s request, the market has not only stayed calm, but the prices have gone down. The OPEC basket of crude has come down from $ 110.9 on July 29 to $ 103.2 per barrel.^[2] The Indian crude oil basket has come down from $ 108.92 to $ 98.31 per barrel during the same period.^[3] This can only be attributed to fear of recession. The US economy has contracted for two quarters in a row. The balance in the oil market remains precarious. Any increase in geopolitical tensions in Europe could again lead to a spike in prices, particularly if the EU goes ahead with its decision to impose sanctions on Russian oil. Russia has hit back, and reduced gas supplies to Europe.

What prompted President Biden’s visit to the Saudi Kingdom was the increase in petrol price at the pump in the USA. This had reached the US-wide average of $ 5 per gallon. This was well past the comfort level of $ 4 per gallon long held as the limit the US consumer could tolerate. This had an ominous implication in an election year. The Congressional elections are due in November. A loss of the Democratic majority in the House would seriously cramp President Biden’s capacity to shape the legislative agenda for the rest of his term.

Oil was not the only issue on President Biden’s agenda. The US President also asserted US’s continued role in the region. He stated ‘We will not walk away and leave a vacuum to be filled by China, Russia or Iran’^[4]. That such a statement was needed underlines the changed geopolitical context of the region. The US was the preponderant power in the Gulf for more than half a century. But Russia successfully re-inserted itself by stabilizing the Assad regime. The US’s hurried departure from Afghanistan may also have affected perceptions of Arab rulers. But this point need not be over-stated. The US had no economic interest in Afghanistan, which was a drain on American treasuries. The M.E. has some of the largest oil reserves in the world. Saudi Arabia and UAE have the largest spare capacity to boost oil production.

President Biden also took the opportunity to nudge the countries toward closer relations with Israel. Unlike UAE, Saudi Arabia has not established formal diplomatic relations with Israel. But during Biden’s visit, it allowed over-flights from Israel. There is a continuity in US policies in terms of support for the Abraham Accords promoted by President Trump. This however, arouses Iranian concern for an ‘Eastern NATO’ taking shape on its western flank.

There has been a change in the historical relationship between the US and Saudi Arabia. King Abdul Aziz and President Roosevelt had struck the bargain of ‘oil for security ’. The Kingdom was to supply oil in return for security provided by the United States. With the discovery of Shale oil, the US may no longer be dependent on the import of crude oil from Saudi Arabia. However, it still needs that country to keep the oil market well supplied as shown by the Presidential visit.

Crown prince Mohammad Bin Salman promised to raise the oil production to 13 million barrels per day by 2027^[5]. But this is the long-range target. President Biden wanted prices to be moderated before the elections. The overriding concern was to maintain oil price stability once the EU sanctions against the import of Russian oil go into effect.

The decision of OPEC+ to affect the smallest increase in recent years was a disappointing response. However, after initially going up, the prices have come down to around $ 100 per barrel. This is good news for consumers the world over. But this has come about with fears of recession.

President Biden’s visit to Israel and Saudi Arabia was followed by the visit of President Putin to the other side of the Gulf. Putin visited Tehran, where he also met the Turkish President. The Turkish economy has been in deep crisis, but its President harbors regional ambitions. Its control of the entry and exit from the Black Sea has underlined its locational advantage for both sides in the Ukraine crisis.

Any escalation in the Ukraine crisis will have negative repercussions for both sides. Russia has continued its oil exports, though it has had to give a deep discount. But the EU has paid a high price. Russia has reduced gas supply through Nordstrom I to 20 % of capacity. According to a Bloomberg report, the price of natural gas has soared in the EU to $ 60 per MMBTU^[6]. This will have a cascading effect on the price of LNG in Asian markets. They have tripled to $ 45.39 per MMBTU on August 12, 2022 from $ 15.65 MMBTU a year ago on 16th August 2021^[7].

High gas prices will push the EU to switch from gas to oil to meet its heating and power needs. This will add to oil demand. The oil market is calm now because of the fear of recession. But if falling prices lead OPEC to cut production again, there will be a spike in crude prices again. The oil prices will also be affected by the fate of the nuclear deal between Iran and P5+1. Recently, the negotiations had been resumed in Vienna. The delegations have now gone back to their capitals for a political decision. If the deal works out, it will pave the way for Iranian oil exports to be resumed. Before the latest round of sanctions, Iran was exporting 2.1 million barrels per day. This will not substitute more than 5 million barrels of Russian oil exports in case EU sanctions against that country deepen. In the meantime, the spiraling action and counter-action by the two sides have already brought the world to the brink of recession.

Endnotes :

^[1]www.opec.org, 31st OPEC and non-Opec Ministerial Meeting, 3rd August 2022
^[2]Oil Price, Oil Price Charts, 12th August 2022
^[3]Oil Price, Oil Price Charts, 12th August 2022
^[4]NPR, Biden says the US ‘will not walk away’ from the Middle East.
^[5]Upstreamonlinecom, No capacity: Saudi Arabia cannot expand oil production beyond 13 million bpd.
^[6]Bloomberg, World Embraces Dirtier Fuels as Gas Hits Exorbitant Heights, 15 August 2022
^[7]Oil Price, Oil Price Chart, 12.8.2022

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