Saudi Arabia reportedly has refused to take a phone call from President Joe Biden. The White House denies the story, but it fits. The countries have been at loggerheads since Biden took office.
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Foolishly, Biden went out of his way early in his presidency to gratuitously insult Mohammed Bin Salman, de facto ruler of Saudi Arabia; among his offensive moves was to tell Saudi officials that he would not speak with MBS, as he is called, but would only deal with his aging father.
That dovetailed with the U.S. abandoning our support for the Saudis in the war in Yemen and Biden releasing an intelligence report implicating MBS in the murder of Jamal Khasoggi.
Biden was on his high horse, smashing anything and everything that his predecessor had accomplished, including his strong strategic relationship with Saudi Arabia.
Now, Biden is reduced to begging Saudi-led OPEC for more oil, a request made several times in the past year that, not surprisingly, has gone unanswered.
Saudi Arabia is the world’s largest oil producer and the only nation that has significant shut-in production. They have long acted as “swing producer,” calming oil markets by ratcheting up output as demand and prices move higher, and reducing production when demand slumps, as happened in 2020.
Today, they could again help bring oil markets into balance, ramping up production to offset Russian oil exports lost to the war in Ukraine. Most likely, they will do so — not to please Joe Biden, but because it is in their long-term best interests. Here’s why:
- As oil prices surge above $100 per barrel, demand destruction begins in earnest;
- Saudi Arabia opposes the United States renewing the JCPOA, the Iran nuclear deal;
- The Saudis do not want to cede market share to Venezuela, Iran or the United States;
- They don’t want to encourage an even faster transition to renewable energy;
- MBS wants acceptance.
As oil prices soar, consumers change their behavior. As we have seen in the past, high oil prices encourage energy conservation, a shift to smaller more gas-efficient cars and other measures which drive down demand.
In late 2014, for instance, when gas prices dropped to the lowest level in years, shunned SUVs made a strong comeback, recouping market share lost to more gas-efficient vehicles.
Today the threat to demand is greater. As Transportation Secretary Pete Buttigieg clumsily suggested recently, higher gasoline prices could drive Americans to buy electric vehicles. A switch would not impact gas demand today, but encouraging more drivers to consider EVs is not in the Saudi’s long-term best interests.
Having the U.S. revive the JCPOA is also not beneficial for the Saudis.
Iran has been a perpetually hostile agent in the Middle East, fomenting conflict via proxies, attacking Saudi Arabia and other Sunni nations and threatening Israel. If the deal is renewed, the Iranians would reportedly gain access to $100 billion, which would fuel their aggression, and will be allowed to increase oil production.There are “sticking points” to striking an agreement, including that Tehran’s mullahs have apparently lied about their program being purely “peaceful.”
In 2018, Israeli Prime Minister Benjamin Netanyahu revealed that Iran had scrubbed evidence of stored equipment and material designated for use in nuclear weapons. The U.N.’s International Atomic Energy Agency has purportedly been blocked from visiting the relevant sites but in its eagerness to do a deal, Iran is now allowing the head of the IAEA to travel to Iran to investigate the charges.
Iran has stockpiled uranium enriched to 60%; enrichment levels needed to generate electricity are below 4%. Also, they have amassed 33.2 kilograms of enriched material; you need 40 kilograms to make a bomb. Count us skeptical that their program is peaceful.
Also holding up a new deal is that Russia, a party to the talks, insists that recently-imposed sanctions on their country should not apply to their commerce with Iran. So far, U.S. negotiators have balked.
The Saudis regard Iran as a mortal enemy. They would rather supply the world’s needed energy than have Iran reengaged via the JCPOA, hiking oil output and edging closer to a nuclear weapon.
The same could be said for ceding market share to Venezuela, or any other producer, including the United States. The extraordinary increase in U.S. production over the past decade drove down oil prices for years, crimping OPEC revenues and requiring Saudi Arabia to shut in production. They do not want to take another hit to their budget.
Increased production from other nations is one threat to their long-term prosperity; the West’s push for renewable energy is another. Though the ambitious emissions goals set by Biden are unrealistic, there is no doubt that the push to green energy will over time limit the growth of oil demand. For the Saudis, too-high oil prices will bring that threat closer.
Finally, MBS could use some reputation repair. Early on he received flattering press coverage for modernization efforts like allowing women to drive. The murder of Khasoggi made him a pariah. He now has a chance to favorably reemerge on the world stage by helping to lower oil prices and calm stock markets.
Oil markets sold off sharply just recently thanks to the UAE and Iraq promising to hike output. The relief is not enough, but the Saudis could make the difference, capping inflation around the world. That would take some pressure off central banks and improve the outlook for global growth.
In recent days, the U.S. sent home a Saudi who is thought to have participated in the 9/11 attacks on the U.S. and who has been held prisoner at Guantanamo since 2002. This is likely a goodwill gesture, aimed at thawing relations between the U.S. and Saudi Arabia.
Biden should be encouraging U.S. oil production, but he is blinded by climate zealotry and appears unable to take that step. At the least, he should do whatever it takes to mend fences with Saudi Arabia.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.