clear

Creating new perspectives since 2009

Trump presses home his Saudi oil advantage after Khashoggi affair

November 23, 2018 at 1:25 am

Saudi Crown Prince Mohammad bin Salman Al Saud (L) meets US President Donald Trump at the White House in Washington, US on 14 March 2017 [Saudi Kingdom Council/Anadolu Agency]

US President Donald Trump has in effect agreed to overlook the killing of journalist Jamal Khashoggi in return for Saudi Arabia’s help to contain oil prices and for its assistance in other areas.

The United States and Britain have seized on the vulnerability of the kingdom and its de facto ruler Crown Prince Mohamed bin Salman to push harder for a partial ceasefire in Yemen and improve relations with Qatar.

The kingdom will also come under heightened pressure to deliver on promises of increased arms purchases and overseas investment as well as reconstruction aid in Yemen.

Khashoggi’s killing inside the Saudi consulate in Istanbul last month has also given the United States leverage over the Saudi government and, by extension, the production policy pursued by the OPEC+ group of oil exporters.

Read: King Salman gives full backing to son despite CIA reports he ordered murder of Khashoggi

Oil traders have certainly made a link between the killing and oil. Khashoggi was killed on Oct. 2. Brent futures hit their highest level in the current cycle on Oct. 3 and have since fallen by more than $23 a barrel.

Several other factors, too, have weighed on oil prices since the end of September.

These include rising production by OPEC and its allies, surging US shale output, more generous than expected waivers for Iran’s exports, a deteriorating economic outlook and hedge fund selling.

But there is little doubt the Khashoggi killing has weakened the kingdom’s international position and made it more anxious to maintain support from the White House, which has included delivering higher oil output and lower prices.

The White House itself has drawn an explicit link between the killing and Saudi Arabia’s posture on oil prices.

Read: How far will Saudi Arabia go to make sure that Bin Salman survives?

Explaining why the president continues to give his full support to the kingdom, the White House cited its help in confronting Iran, agreeing to invest in the United States and arms sales.

The official statement also highlighted Saudi Arabia’s importance as one of the world’s largest oil producers and praised the kingdom for working closely with the president to keep a lid on prices.

“They have worked closely with us and have been very responsive to my requests to keeping oil prices at reasonable levels – so important for the world,” the president said in his statement.

The president subsequently commended Saudi Arabia on Twitter, writing on Nov. 21: “Oil prices getting lower. Great! Like a big Tax Cut for America and the World … Thank you to Saudi Arabia, but let’s go lower.”

The president’s praise for Saudi Arabia marked a significant shift from his repeated criticism of OPEC this year for pushing prices higher.

Trump’s comments on Twitter and television since the start of the year have made it clear he wants Brent prices well below $80 a barrel and perhaps below $70.

Saudi Arabia is now much less able to resist such pressure.

Read: US lawmakers adopt legal measures for hard line against Saudi Prince

The United States has always been one of the world’s largest oil producers as well as its largest consumer, with the result that presidents tend to favour “moderate” oil prices.

High prices penalise US motorists while low prices threaten the viability of the oil industry in politically and economically important states such as Texas.

High prices hurt consumers and energy-intensive manufacturers, but low prices threaten oil and gas investment as well as business activity throughout the industry’s supply chain, including steelmakers, railroads and trucking firms.

The shale revolution has more than doubled US oil production since 2008 but it has not altered the fundamental political and economic logic.

Trump seems to have calculated, probably correctly, that lower rather than higher oil prices are important if he is to be re-elected in 2020.

Motorists and energy-intensive manufacturers far outnumber voters employed in the oil and gas industry and its supply chain.

Moreover, most US oil production is concentrated in states that already lean heavily towards his own Republican Party and are likely to vote for him again (including Texas, North Dakota, Alaska and Oklahoma).

Oil vs Free Speech – Cartoon [AlArabi21News/Twitter]

By contrast, the swing states he needs to assemble a majority in the electoral college are dominated by oil consumers (including Ohio, Pennsylvania, Michigan, Wisconsin and Florida).

The White House also calculates that lower oil prices will stimulate consumer spending and provide a late-cycle boost to the economy, growth and jobs.

Provided prices fall moderately and do not slump, the boost to consumption will more than offset the hit to investment within the oil and gas sector and its supply chain.

Domestic oil and gas producers may not be happy with the president’s advocacy for lower prices, but they are unlikely to support the Democratic Party’s nominee in 2020. In electoral politics, oil and gas producers have nowhere else to go – leaving the president free to concentrate on winning support from oil consumers in swing states.

Trump’s marginal voter in 2020 will be an oil consumer rather than an oil producer.

Read: Saudi crown prince leaves for tour of Arab states amid Khashoggi controversy

The president’s preferred oil price to maximise his chances of re-election is somewhat lower than Saudi Arabia appeared to be comfortable with a few months ago.

But he has sent a clear message to OPEC+ in general, and Saudi Arabia in particular, about what he wants in terms of oil market management strategy and prices.

The White House expects Saudi Arabia to ensure prices do not spike again in the months ahead in exchange for its continued support, and the president is not known for his patience.

Saudi Arabia and its allies may still trim production in 2019 to avoid a renewed glut in the oil market, but the cuts are likely to be smaller than if Khashoggi had not been killed.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.