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Can The U.S. Convince Saudi Arabia To End The Oil War?

US Secretary of State Michael Pompeo is applying verbal pressure to Saudi Arabia, encouraging the Middle Eastern country who started the oil price war to “rise to the occasion” and reassure the oil markets, the State Department has said, according to the Arab News.

Pompeo spoke to Saudi Arabia’s Crown Prince Mohammed bin Salman (MbS) before a G20 conference call, urging at least action through words, at a time when oil prices are particularly vulnerable—not just because of the oil price war, but also because of the depressed demand stemming from the coronavirus.

But the words seem laughable, given that the low oil prices are precisely what Saudi Arabia is hoping to achieve.

Saudi Arabia has, for years, been doing the lion’s share of the production cutting that OPEC agreed on to hold up oil prices, at great cost to its own finances. Meanwhile, other OPEC nations such as Iraq, have done precious little to toe the OPEC line, and Saudi Arabia has had to cut more to offset the noncompliant members. Russia, too, has failed to live up to its part of the production cuts.

When the OPEC+ deal fell apart a couple of weeks ago, it was Russia’s reluctance to cut more and for longer—as if they had restricted production to any great extent in the first place, overproducing nearly—if not every—month throughout the deal. Its rationale for refusing to cut and to cut more are not without merit. First, Russia’s oilfields cannot be turned on and off as easily as others, such as US shale. Second, cutting back production to manipulate the prices only works if the world’s largest producer—the United States—were to play along too. And it’s not. Cutting back production further, Russia contends, opens the door for US shale to take even more market share.

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The refusal was the last straw for Saudi Arabia, and it responded by playing hardball, threatening to increase its production as of April 1, when the current OPEC production agreement is set to end. Saudi Arabia is likely hoping that the low oil prices will be Russia back to the table. Russia, likewise, is hoping Saudi Arabia won’t have the staying power to hold the line at $20-SOMETHING oil.

For now, this is precisely the situation Saudi Arabia was hoping for—pain for other oil producers to bring about a change in action. Saudi Arabia, however, probably didn’t expect the prices to drop off quite so quickly, helped by the devastating effects of the global COVID-19 pandemic.

Without some incentive, and there may be one that the United States is offering, MbS has little reason to undo the damage it has intentionally inflicted in the oil markets.

By Julianne Geiger for Oilprice.com

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