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The Saudis feel that the U.S. has overstepped its bounds by releasing oil from the SPR to relieve high oil prices
President Biden has crossed the red line in Saudi Arabia’s swing producer turf, and the Saudis, … [+]
Last week, Saudi Arabia’s Minister of Energy, Prince Abdulaziz bin Salman Al Saud, reiterated the longstanding Saudi stance that they don’t focus on price; it’s all about supply and demand for OPEC’s leading swing producer. But that’s not the whole story.
The real message that came out of last week’s OPEC meeting is clear: Saudi Arabia and OPEC are the world’s crude oil swing producers; they are the ones who want to be in control, and in fact are largely in control, of short-term oil prices. Long term oil prices are determined by tectonic shifts in production, much of which is out of Saudi – or any single individual or entity’s – control. Think about the development of shale and horizontal drilling technologies that the U.S. developed and implemented to catapult the U.S. into the top spot as the world’s preeminent oil producer – that process was deployed globally over many years across vast production fields and is not something that can be controlled by a singular decision by any one person, producer, country or company. It was the result geologic engineering advancements, long-term economics, and government policies inside the U.S. that allowed it to happen.
That said, Saudi Arabia stands alone in its ability to turn on or off the oil taps on short notice. Saudi Arabia is also the big daddy in OPEC by virtue of the fact that it controls the overwhelming amount of production relative to other OPEC members. It is the world’s undisputed swing producer.
President Biden has stepped into the fray with his use of the Strategic Petroleum Reserve (SPR) as a means of having the U.S. act as a swing producer of oil as well. Releasing oil from the SPR is, in fact, the only way a U.S. President can directly affect the short-term supply of oil because the U.S. operates under a free market system. Oil producers make their own choices as to how much oil to produce and when, and those decisions are driven by market economics and government policies.
The Saudis are also the world’s preeminent petro-economists. They know the fundamentals of the global oil markets better than anyone, and they try to maintain a delicate balance between supply and demand while keeping oil prices high enough to stimulate continued (and additional) oil production but low enough to keep from destabilizing the global economy which, in turn, would hurt oil demand. By backing the latest OPEC production cut, the Saudi’s are clearly signalling their belief that the global economy is weakening and that oil demand will slow as a result.
But headlines about the U.S. use of its SPR are what are in focus right now, and the Saudis clearly feel the need to send an additional message. The Saudis know they are likely to win the long-term oil production battle as western nations continue to deemphasize carbon based fuel use with policies that actively discourage, and in some cases actually punish, investment in traditional carbon based fuel production, including crude oil and natural gas. They are secure with their long-term positioning and likely dominance of global oil markets far into the future. But right now short term considerations are also in play, and the Saudis feel that the U.S. has overstepped its bounds by releasing oil from the SPR to relieve prices.
President Biden clearly has crossed the red line in Saudi Arabia’s swing producer turf, and the Saudi message is brutally pragmatic: President Biden’s continued use of SPR inventories as a price cap for crude oil is a Sisyphean task, courtesy of the Saudis and OPEC.