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Global Oil War: What Are Its Cons And Pros To US?

Alwaght– As the coronavirus outbreak forced down the global demands for oil and the major oil suppliers so far failed to reach an agreement on the amount of the supply they have to release to the market, the crude prices have sharply fallen.

Responding to the situation, the US Secretary of State Mike Pompeo on Wednesday revealed that he talked to the Saudi Crown Prince Mohammad bin Salman on the case. The details of the conversation, or better to say Washington’s expectations from Riyadh, were not given publicity but State Department Spokeswoman Morgan Ortagus in a statement that appeared also on the Department’s website said that Mike Pompeo on the phone asked the Arab kingdom’s de facto ruler for a more effective role to stabilize the energy markets.

An inquiry of the stances taken by the American politicians over the past few weeks about the case reveals how contrasting the views of the elites are concerning the consequences of ongoing low oil prices. According to a report by the Politico website, American President Donald Trump is glad about the Saudi plan for an increase of oil production meant to expel Russia, a major rival in the energy market, from some markets. While on the one side Trump is for the damage to Russia, he on the other side is worried that sagging oil prices will be detrimental to the American energy producers as the oil prices move further downward.

The American opinion outlet, quoting informed sources, further held that during a March 9 phone call to the Saudi king-in-waiting, Trump asked bin Salman to keep the oil prices low but at the same time make sure that they do not go so low to extend damage to the American oil companies and that they should stay in the industry.

The low oil prices are working for his good in the upcoming elections. Trump, grappling with the hugely negative impacts of the coronavirus crisis on the national economy, announced that the US will purchase large quantities of cheap oil for storage reserve.

“Based on the price of oil, I’ve also instructed the Secretary of Energy to purchase at a very good price large quantities of crude oil for storage in the S strategic reserve,” Trump said on March 13.

The huge oil purchases can assure the American consumers of relatively long-time low fuel prices and consequently save his position in the November 3 presidential race.

“Frankly, that’s like a big tax cut, not a little tax cut for the consumer, Trump told the reporters, adding “so, there is something about that that I like.”

The fact that the competition between Saudi Arabia and Russia as the founders of the OPEC+ serves in the best interest of the US should not be underestimated. This alliance is now falling apart. Trump did not hide his pleasure with low oil prices taking a toll on the Russian economy and also on the Russian share from the energy markets when he addressed the reporters at a news conference at the White House on March 19.

“It’s very devastating to Russia because when you look at it, their whole economy is based on that and we have the lowest oil prices in decades so it’s very devastating to Russia. I would say it is very bad for Saudi Arabia but they’re in a fight, they’re in a fight on price, they’re in a fight on output. At the appropriate time I’ll get involved,” he told the journalists.

Now the question is that does the Wednesday phone call to Mohammed bin Salman mean the appropriate time has come?

Apparently, in the American elite circles, not all are supportive, like Trump, of low oil prices. Earlier this month, 10 Republican senators, mainly from oil-producing states demanded Trump threaten Russia with sanctions to stabilize the oil market.

Furthermore, a group of 13 Republican senators wrote a letter to Saudi Crown Prince Mohammed bin Salman asking that the kingdom stop its decision to ramp up oil production and flood the global market.

 “As the United States and the rest of the world—including the Kingdom of Saudi Arabia—are dealing with COVID-19 pandemic response, mitigation and prevention efforts, the added impact of unsettled global energy markets is an unwelcome development,” the senators wrote.

“We urge the Kingdom to assert constructive leadership in stabilizing the world economy by calming economic anxiety in the oil and gas sector at a time when countries around the world are addressing the pandemic,” they added.

The congressmen called for diplomatic interaction with the Saudis to halt the destructive impacts of the oil war between Saudi Arabia and Russia on the American oil industry. Certainly, if this trend continues, a large number of US oil companies that are producing oil with high costs will go bankrupt. To keep the US shale oil industry going and economical, $70 per barrel is required. That is while now the major oil suppliers offer unprecedented discounted prices like $15, $10, and even $8 per barrel to save their consumers. Aramco, Saudi Arabia’s state-run oil giant, stated recently that its oil for April delivery to the European consumers will be only $15 for a barrel.

But will the talks with the Saudi leaders to stop flooding the oil markets work? The Bloomberg news reported that the Saudis have affirmatively responded to Trump’s demand to keep the oil low-priced which means they are not listening to calls from the American lawmakers.

Over 80 years of relations between Saudi Arabia and the US, which were first opened by Franklin Roosevelt meeting the modern Saudi Arabia state founder King Abdulaziz bin Saud on a navy warship in 1945, have seen many changes for a variety of reasons.

While Saudi Arabia is still the world’s largest oil supplier, the US as a major consumer no longer needs Saudi oil.

In 2001, the US oil imports from Saudi Arabia were 2.66 million a day. This amount reduced to 1.47 million in 2018, showing a 44 percent drop. Since 2018, the US became a serious rival to the traditional oil market heavyweights, setting off the alarm bells to the Saudis. That is happening at a time when bin Salman’s ambitious growth plans desperately require oil-provided finances. That is why Saudi Arabia refused to accept the unilateral oil supply cut as one of the two actors of the OPEC+ at March 6 meeting. From another dimension, as West Asia loses significance in the American foreign policy doctrine under Trump, the American politicians understand that the essential prerequisite for the unique US-Saudi relations, which is the oil for security, no longer stands. Saudi Arabia’s rejection of the congressmen’s oil call is unprecedented, however.

Although during the Cold War the close Saudi-American ties and coordination undercut the Soviet power to press the West using the oil pressure tool, in 1986 Washington tried to persuade Riyadh to end the oil war it waged against Moscow. At the time, President Ronald Reagan sent his Vice President George Bush to lure the Saudis into shifting their oil course. Bush failed to accomplish his mission and so the oil price war lingered for more six months.

Now it is unclear what the US administration can do to press Saudi Arabia and Russia to cut their oil supplies to the global markets. Sometimes, the war on market share may take months to end. Additionally, now the Saudi coordination with the US is not the only factor that will improve the oil prices.

Nigeria, another major oil exporter, is offering hugely-discounted oil. Exports of Qua Iboe and Bonny Light, two of Nigeria’s biggest crude grades will be sold in April for discounts of more than $3 to benchmark and Brent which was lower than what it sold its oil during the 2008 financial crises. Colombia is offering similar discounts, selling its oil $7.7 per barrel.

The consumption also has fallen sharply as coronavirus pandemic broke out three months ago in China and lately engulfed the whole world, especially Europe and the US. Add to this the end of winter, the season the energy consumption reaches its climactic point worldwide. In France and Italy, hardest-hit by the fatal virus, energy consumption dropped to one-third, meaning that the oil refineries had to reduce their activities as the demands have fallen.

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