Thursday’s passage by a U.S. Senate committee of the No Petroleum Production or Export Cartels (NOPEC) bill is the surest sign that Washington has finally lost patience with Saudi Arabia and with the Organization of the Petroleum Exporting Countries (OPEC), in their indifference to high oil prices, their continued relationship with key OPEC+ member Russia, and their continued drift towards the China- Russia.
Washington has decided that now may be the time to up the ante on its former allies and drop the Damoclean sword of the NOPEC bill if necessary, it seems.
The stakes are huge for Saudi Arabia, OPEC and key OPEC+ member Russia, because the NOPEC bill, as thoroughly analyzed in all my books on the oil sector since 2014, including understood at length in the most recent, has a wide scope. mandate to declare it illegal to artificially cap oil production or fix prices.
OPEC was specifically mandated when it was founded in 1960 to “coordinate and unify the oil policies” of all of its member states, effectively setting oil prices.
Given that OPEC members account for about 40% of global crude oil production, about 60% of total internationally traded oil from their oil exports, and just over 80% of the world’s proven reserves of oil, its influence on the world oil market has been cartel-like.
The NOPEC bill, if enacted, would immediately and dramatically prevent all actions or statements by OPEC in particular, its key members and its de facto leader, Saudi Arabia.
This would include coordinated reductions or increases in oil production and statements relating to where the organization or any of its major members, including Saudi Arabia, forecasts production levels or oil prices. oil in the future.
It would also immediately remove the sovereign immunity that existed in US courts for OPEC as a group and for its individual member states.
This would leave Saudi Arabia open to prosecution under existing US antitrust law, with its total liability estimated at $1 trillion in investments in the United States alone, as is also thoroughly analyzed in my new book on world oil markets.
For Saudi Arabia, it would also mean that the effective value of its flagship oil and gas giant, Saudi Aramco, could be zero, given that it is the key corporate instrument used to manage oil flows. of the de facto leader of the world’s largest de facto oil cartel.
Although Saudi Aramco is not directly involved in shaping the policy, US and UK antitrust law may indicate that Aramco is complicit in price fixing by adjusting its production to help manage oil prices and by its key executives making statements. about the company’s future production levels and price expectations.
This view is further reinforced by the fact that such a small percentage of its shares were floated in the initial public offering in December 2019, and it was made clear at the time of the offering that the company would remain directed by the government of Saudi Arabia.
Indeed, Saudi Aramco CEO Amin Nasser said at the time of the IPO that Saudi Aramco’s oil and gas production decisions were sovereign matters that would remain in the hands of the government.
It would also mean that trading in Aramco’s products, including oil, would be subject to anti-trust laws, which means a ban on sales in US dollars.
It would further mean the eventual splitting of Aramco into much smaller constituent companies that are not able to influence the price of oil, if the Saudis could offer no other way to comply with anti-trust laws.
Whether the situation will come to the end use of the threat of the NOPEC bill is a function of three factors: the first was the breakdown of the basic 1945 agreement between then-President Franklin D. Roosevelt and then-Saudi King Abdulaziz aboard the US Navy cruiser Quincy in the Suez Canal.
The deal they agreed to, which went relatively smoothly for years, was that the United States would get all the oil supplies it needed as long as Saudi Arabia had oil in place, in in exchange for which the United States would guarantee the security of the two ruling House of Saud and, by extension, Saudi Arabia.
Although there was a bump in the road with the 1973/4 oil embargo, the real challenge to this deal came during the 2014-2016 oil price war initiated by Saudi Arabia with the primary purpose of destroying or at least severely disabling the then fledgling system. US shale oil industry.
From the earliest days, particularly under the administration of former President Donald Trump, the threat of passage of the NOPEC bill was used to “persuade” the Saudis into joining the “Trump Oil Range”, a floor of 35 to 40 USD per barrel of Brent. (the price above which most US shale oil producers could make a profit) and a cap of $75-80 per barrel (above which there would likely be negative economic effects for the US) .
The second reason is the apparent indifference of the Saudis and OPEC to helping bring down oil prices at this time, as the Saudi Crown Prince, Mohammed bin Salman (and the Crown Prince of Abu Dhabi, Mohammed bin Zayed Al Nahyan) even refused to take an urgent phone call on the subject from President Joe Biden.
For the US economy, historical precedent shows that every US$10 per barrel change in the price of crude oil results in a 25 to 30 cent change in the price of a gallon of gasoline.
The long-standing corollary rule of thumb is that for every penny increase in the average price of gasoline in the United States, more than US$1 billion a year in additional discretionary consumer spending is lost.
Politically, it is a historical fact, as my new book on world oil markets shows, that since World War I the sitting American president has been re-elected 11 out of 11 times if the American economy was not in recession. within two years of a next election.
However, presidents who embarked on a re-election campaign while the economy was in recession have only won one in seven times. President Biden, or whoever the Democratic nominee is, will face another presidential election in 2024, but even before that he will face a critical midterm election in November 2022, when his Democrats could lose their narrow majority in the House of Representatives.
The third reason for America’s growing fury at Saudi Arabia’s and OPEC’s disregard for previous agreements and assurances made with the United States is that all this time they have come closer to the Sino-Russian axis of power and that Washington now fully considers this to have reached a political inflection point which is turning into a veritable “zero-sum game”.
Saudi Arabia has pushed for broader and deeper Arab state cooperation both in general terms and specifically through the Gulf Cooperation Council (GCC), and appears to be drifting further into the Saudi sphere of influence. China since at least 2016.
This was underscored recently by the recent series of meetings in Beijing between senior Chinese government officials and the foreign ministers of Saudi Arabia, Kuwait, Oman, Bahrain and the Secretary General of the Gulf Cooperation Council (CCG).
At those meetings, the main topics of conversation were finally sealing a China-GCC free trade deal and “deeper strategic cooperation in a region where US dominance is showing signs of receding,” according to local reports.
By: Simon Watkins
Watkins reports for Oilprice.com