Ann Arbor (Informed Comment) – On April 2, the Republican Party more or less joined the Organization of Petroleum Exporting States Plus (OPEC+). That is the upshot of reporting by Timothy Gardner, Steve Holland, Dmitry Zhdannikov, and Rania El Gamal for Reuters that Trump threatened de facto Saudi ruler crown prince Mohammed Bin Salman with a complete withdrawal of the US security umbrella from Saudi Arabia unless Riyadh reversed its plans to flood the market with oil. Actually, Trump said that if Bin Salman did not cancel the plan to pump extra petroleum at a time of glut, then the president would not intervene with Republican senators from oil states to stop a bill to pull Patriot anti-missile batteries and other military cooperation from the kingdom. The Republican senators were also angry that they had run interference for Saudi Arabia over its brutal war on little Yemen, but had nothing to show for it. They did not say so, but powerful Republicans are probably also angry that they helped deflect heat from Bin Salman over the murder in an Istanbul consulate of Washington Post columnist Jamal Khashoggi, but had gotten nothing for it.
Bin Salman was reportedly so shaken when he realized what Trump was saying that he asked his aides to leave the room so he could have the conversation in private.
Earlier, some dozen Republican senators from oil states had had a conference call with the Saudi ambassador in Washington, Princess Reema bint Bandar, in which they let her have it with both barrels.
In February of 2019, Reuters reported that Trump and some senators like Chuck Grassley of Iowa (who draws support from the corn ethanol lobby) wanted to try to destroy OPEC, charging that it is an illegal cartel that keeps gasoline prices artificially high for American drivers. OPEC at its regular meetings in Vienna assigns members quotas for oil production, which is a form of collusion and price fixing. Cartels are common in primary commodity markets because these products experience big swings in price that make it difficult for producers to survive unless they smooth out the peaks and valleys. Hence, the coffee cartel, etc.
A little over a year later, Trump was angrily upbraiding Saudi Arabia for not acting enough like a cartel.
When the oil price plummeted in March because of the global coronavirus Recession, Saudi Arabia and the rest of OPEC+ asked Russia (which is the + since it isn’t ordinarily a member) to join in cutting production so as to support the price. Russia initially refused to do so, on the grounds that this step would benefit the US shale oil industry, a competitor for Russia that seeks to take away from Moscow some of its market share. Russia asked why it should cut production to help American hydraulic fracturing — Russia’s competitor.
Saudi Arabia felt threatened by this Russian stance of independence, and decided to punish Russia for not playing ball, by opening the spigots and sending the price of oil so far down that it would bring the pain to Moscow. This maneuver would, the Saudis thought, imposed cartel discipline on Russia forever, thereafter.
But if Saudi Arabia started pumping a couple million extra barrels a day when global demand had fallen from 100 million barrels a day to 70 million barrels a day, it would send oil prices 20,000 leagues beneath the sea. And that would drive many shale oil producers to bankruptcy, since it costs $40 to $60 a barrel to produce oil from shale by hydraulic fracturing. A week and a half ago, the last of the May oil actually traded for some -$37 a barrel one day, that is, the producers would have to pay someone to take it off their hands because of lack of storage facilities.
Sen. Kevin Cramer of North Dakota (where the lion’s share of the dirty, polluting fracked oil is) led the charge to craft legislation that would leave Saudi Arabia defenseless and twisting in the wind in front of an irate Iran and other enemies. It was that bill that Trump threatened Bin Salman with.
So Trump insisted with OPEC+ (including Vladimir Putin’s Russia) that they do their effing job and put prices back up to forestall a collapse of the US petroleum industry.
When oil prices began falling in March, Trump was pleased, and said that cheaper gasoline would be good for the consumer. But once the oil state senators began phoning him angrily, Trump all of a sudden became very support of OPEC, and, indeed, insisted that they swing into action to support higher prices.
So Trump sided with US Big Oil against the consumers. What a surprise.
But it was all for naught. Even after the OPEC deal, oil prices are soft, and there isn’t an early prospect of oil prices rising much.