OPEC+ will meet Thursday amid the war in Ukraine and associated sanctions, which have sharply reduced Russian crude oil and petroleum products exports.
But the meeting of the oil cartel and its allies will likely only result in a continuation of monthly 400,000 barrels per day quota increases, less than half of which is matched to countries with unused capacity.
That outcome is a sharp departure from a bedrock assumption underpinning the U.S. relationships with Saudi Arabia and the United Arab Emirates—that they would use available spare capacity to help offset volume losses elsewhere when the world oil market faced a genuine crisis, as it does now.
Saudi Arabia and the U.A.E. have chosen to severely weaken their ties with Washington. They are explicitly linking a threat to withhold production increases to demands for U.S. policy changes on other issues in the Middle East.
In the process, they are driving a wave of inflation in the U.S. and elsewhere. In their dealings with the U.S., Saudis, in particular, have often suggested that their maintenance of spare capacity provides a global public good.
They had brought that capacity to bear to calm the market even when they disagreed with the U.S. on policy, such as increasing supply markedly in early 2003 as the U.S. prepared to topple Saddam Hussein. Not so now.
A statement on March 9 by Yousef Al Otaiba, the Emirati ambassador to the U.S., initially hinted at an accelerated production increase and led to a sharp market correction. That position quickly changed.
The two governments signaled via apparently authorized leaks in several prominent media outlets and op-eds by pro-Saudi commentators that both Saudi Arabia and the U.A.E. want to use the current oil shortage to force the U.S. to make a slew of policy concessions.
Their demands include greater U.S. military and intelligence support for their war in Yemen, for President Biden to back off his goal of negotiating a restoration of the 2015 nuclear deal with Iran, and for the president to deal directly with Crown Prince Mohammad bin Salman.
In particular, the two governments are demanding that the U.S. restore the Houthi movement's designation as a terrorist organization. The Houthis have fought against Saudi Arabia and the U.A.E. in their war in Yemen.
The Trump administration added the Houthis to the terror list, but Biden lifted the designation in 2021 and has been unwilling to reinstate it due to concerns that it would impede humanitarian aid to assuage the famine in parts of Yemen.
While pro-Saudi and U.A.E. sources have said that the Biden administration seems to be preparing to make concessions in the face of high oil prices, it is unlikely the administration will cave, except perhaps on the symbolic matter of Biden dealing directly with MBS, as the crown prince is known.
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Biden has not spoken directly to MBS since taking office. It is telling that the sourcing on the press coverage suggesting that the U.S. will make concessions appears to be from people on the Saudi/U.A.E. side, with no senior U.S. officials confirming any of this narrative.
It also tells that Secretary of State Antony Blinken is visiting only two Arab countries on his current trip abroad, Morocco and Algeria after it was widely reported in early March that he was considering visits to Saudi Arabia and the UAE.
This pressure campaign in the media is heavy-handed, and the demands the two Arab governments are making are not trivial. But it is unlikely that they will be reorienting themselves toward China and Russia, as the narrative has suggested.
China plays both sides in the Gulf and has shown no interest in abandoning its ties to Iran or selling its best military technology, such as the fifth-generation J-20 stealth fighter. Russia is self-immolating before our eyes, weakening itself as a major energy and military power.
For financial markets, the most likely outcome is a continuation of tightening in the world oil market, as China and India buy up only a small proportion of the supplies now banned by U.S. sanctions and rejected by many refiners in Europe and Asia ex-China.
The market will have to seek a price level that curtails demand for a price-inelastic commodity. For Saudi Arabia and the U.A.E., despite their dependence on the U.S. for military hardware and services, the Biden administration is not likely to directly exploit those vulnerabilities.
And if this gambit fails, they will have severely weakened their relationships with the U.S. and Europe. It has always been acknowledged that the West does not share common values with these absolute monarchies. Why should the West offer them support if they’re no longer willing to be reliable energy partners?