An orchestrated endeavor by Saudi Arabia and Russia to propel the price of oil towards the $100 per barrel echelon looms ominously, presenting yet another conundrum for President Joe Biden. This scenario unfolds as he centers his re-election campaign on bolstering the US economy and combatting the specter of inflation.
This week witnessed Brent crude surmounting the $90 per barrel threshold for the first time in 2023. This surge comes on the heels of Riyadh and Moscow’s decision to prolong supply reductions until year’s end. Remarkably, oil prices had already escalated by a staggering 25 percent since June, buoyed by surging global demand.
Saudi Arabia’s gambit to elevate oil prices further is fraught with diplomatic implications, potentially resuscitating tensions between Riyadh and Washington. This transpires at a juncture when the United States is diligently pursuing a historic rapprochement between Israel and the kingdom while endeavoring to forge a robust coalition against Russia at the upcoming G20 summit in India.
“There is currently a dearth of benevolence towards Saudi Arabia in Washington. The peril exists that they may emerge as ‘Exhibit A’ should Washington seek to cast blame for elevated pump prices or a decelerating economy,” cautioned Raad Alkadiri, an astute analyst at Eurasia Group in Washington.
The extension of these production curbs transpires at a delicate domestic juncture for the White House. The administration has proudly heralded a resurgent economy and a moderating inflation rate as vindication of its economic policies, often referred to as “Bidenomics.”
Gasoline prices, it should be noted, wield disproportionate influence over voters’ perception of the economy. Analysts posit that an increasingly constrained oil market may precipitate a surge in crude oil prices, potentially reaching $100 per barrel by year’s end. This, in turn, could stoke inflationary pressures at a time when inflation is beginning to exhibit signs of abatement in Western economies.
“The White House confronts the peril that mounting gasoline prices may reverse the prevailing narrative of economic amelioration and waning inflation,” elucidated Richard Bronze, co-founder of Energy Aspects, a reputable consultancy.
The prospect of further gasoline price hikes could complicate matters for the US Federal Reserve as it grapples with the decision of whether to implement additional interest rate hikes, especially given the current 22-year high in interest rates.
Alan Detmeister, an accomplished economist at UBS and a former Federal Reserve staff member, anticipates a substantial uptick in the consumer price index for August when the data is unveiled next week. This anticipated surge can be attributed to escalating petrol costs. Furthermore, he foresees yet another upswing in the September data, slated for release in October.
While price hikes in other sectors may offer some mitigation against energy-fueled inflation, oil price oscillations could feasibly push annual US inflation to at least 4 percent in September, as opposed to the current rate of 3.2 percent.
The distressing reality is already palpable at American petrol stations, where prices have soared by nearly a quarter over the course of this year, now resting at a hefty $3.80 per gallon. Although these prices remain beneath the record highs that exceeded $5 last summer, they nevertheless stand a staggering 60 percent higher than when President Biden assumed office in January 2021.
The surging inflation in fuel prices, conspicuously illuminated by brightly lit signage along major roadways throughout the nation, has provided ample ammunition for Biden’s Republican adversaries in anticipation of the forthcoming presidential election. These political opponents place the blame squarely on the White House, contending that its climate-focused policies have taken precedence over bolstering domestic oil production.
“They are exploiting environmental concerns to the detriment of the populace. We possess a veritable treasure trove right beneath our feet. We were reaping immense profits. And then, inexplicably, the spigot was turned off,” vociferated Donald Trump, the former president and current front-runner in the Republican primary, during a recent Newsmax interview. He went on to affirm, “We shall recommence drilling with unbridled fervor… We shall precipitate a precipitous decline in energy prices.”
It is noteworthy that last year, during a global energy price crisis that ensued in the wake of Russia’s comprehensive invasion of Ukraine, the White House deployed extensive measures as petrol prices neared and exceeded the politically sensitive threshold of $4 per gallon.
Biden implored shale drilling companies to augment their oil production and subsequently authorized the release of record quantities of crude oil from federal emergency stockpiles onto the market. This intervention proved effective in taming the sharp ascent of oil prices.
However, the efficacy of these measures has waned over time. The once prolific shale sector is now experiencing sluggish growth, while the Strategic Petroleum Reserve has dwindled to its lowest levels since 1983. This combination has significantly bolstered oil markets, as global demand for fuel continues to surge, thereby affording Saudi Arabia greater leverage over oil prices.
Chris Christie, the former governor of New Jersey, who is currently vying for the Republican nomination, posited that Biden’s cool rapport with Riyadh played a pivotal role in Crown Prince Mohammed bin Salman’s decision to strike a pact with Russia to implement further oil supply reductions.
“The Crown Prince is sending a clear message to Joe Biden,” asserted Christie during an appearance on Fox Business. “If you won’t cultivate a positive relationship with us, we shall forge one with Russia.”
Energy traders have also expressed bewilderment regarding Saudi Arabia’s extension of oil production cuts, given the substantial price hikes already witnessed in the past three months.
Astute observers of OPEC’s dynamics contend that Saudi Arabia’s stance is nuanced, even as speculation abounds regarding Riyadh’s potential role in a tightly contested US election.
The Crown Prince’s vision entails achieving a higher oil price to fund ambitious initiatives, ranging from the construction of the visionary city of Neom on the shores of the Red Sea to high-profile acquisitions of soccer luminaries like Cristiano Ronaldo.
“The undeniable reality is that the Saudi budget and MBS’s long-term aspirations necessitate oil prices hovering around $85 or higher,” elucidated Alkadiri. “Projects of the magnitude of Neom cannot be realized with oil priced at $70 per barrel.”
Efforts by the White House to rebuild its ties with Riyadh represent a marked shift from Biden’s campaign promise to isolate the kingdom. This shift accounts for the administration’s restrained response to this week’s announcement of production cuts, as per analysts’ insights.
This stands in stark contrast to the stance adopted last October when Saudi Arabia led OPEC and its allies in implementing production cuts, which prompted the White House to accuse the cartel of aligning itself with Russia amid the Ukraine crisis and the ensuing energy turmoil in Europe.
Jake Sullivan, Biden’s National Security Advisor, remarked on Tuesday, following Riyadh’s announcement of additional cuts, that the White House intends to maintain “regular engagement with the Saudis.” He underscored that the “ultimate yardstick” for assessing Biden’s success would be “the price of a gallon of gasoline for the American consumer.”
Biden may have the opportunity to meet with Crown Prince Mohammed bin Salman at the upcoming G20 summit in New Delhi, although no formal bilateral meeting has been confirmed.
“It appears that this time, they are adopting a more strategic, long-term approach, contemplating the US-Saudi relationship as more than merely an energy supply partnership,” posited Kevin Book of Clearview Energy Partners in Washington.
“Normalization of relations between Israel and Saudi Arabia appears to transcend concerns over $90 per barrel. However, at $120, we could witness a divergent outcome.”
Analysts suggest that Saudi Arabia is also seeking to enhance its bargaining power in discussions with the White House. The kingdom harbors an extensive wish list, encompassing a desire for augmented military support and backing for a civilian nuclear program.
The kingdom’s pledge to intervene in the event that oil prices ascend excessively high remains a potent card in Riyadh’s hand. Notably, the announcement includes a monthly review of production cuts, a strategic move that analysts believe could be deployed as a bargaining chip in negotiations, especially as the election campaign intensifies.
“Saudi Arabia wields significant leverage across various fronts at present,” affirmed Karen Young, affiliated with Columbia University’s Center on Global Energy Policy. “Confronted with an administration entering an election cycle, they hold a formidable hand.”
