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Trump and Saudi Arabia at odds over oil prices

Public Policy

U.S. President Donald Trump and the Saudi government have closely aligned views on most issues but they disagree significantly on the desirable level for oil prices, which could become a source of volatility in 2019/2020.

FILE PHOTO: The sun sets behind an oil pump outside Saint-Fiacre, near Paris, France March 28, 2019. REUTERS/Christian Hartmann/File Photo

In keeping with his iconoclastic approach to governing, Trump has kept up a public commentary on oil prices and the role of Saudi-led OPEC in messages on Twitter as well as television interviews.

So far in 2018/19, the president’s interventions have revealed his preference for a benchmark oil price below $70 per barrel (using front-month Brent futures as a benchmark) (tmsnrt.rs/2WtPwKO).

He has normally restricted himself to generalized criticism of the Organization of the Petroleum Exporting Countries (OPEC) when prices have been below $75 per barrel.

However, when prices have moved above that level, Trump has sharpened his criticism, singling out Saudi Arabia and other Gulf states, and noting that they benefit from an expensive U.S. security umbrella.

The United States is increasingly both a major producer and consumer of petroleum, so the main impact of changing prices is no longer felt through the external balance of payments but the internal distribution of income.

Rising prices transfer income from consumers, motorists and the industrial Midwest to oil drillers and producing states such as Texas, Oklahoma, North Dakota and Alaska.

The president calculates, correctly, that the marginal voter in his electoral coalition in 2016 and likely again in 2020 is a motorist in the Midwest rather than a driller in Texas.

He risks losing more voters from a rise in prices than he does from a fall, which explains why his messaging on Twitter has focused on the benefits from lower prices.

Recent presidential comments have also revealed a preoccupation with the fragility of the economy as the global expansion slows, and modestly lower oil prices would, on balance, support continued growth.

SAUDI REVENUE

In contrast, Saudi Arabia needs prices above $70 and perhaps over $80 to shore up its government finances, pay for an expensive economic transformation, and stem the deterioration in its own balance of payments.

Saudi Arabia’s total foreign reserve assets were unchanged at the end of 2018 from the end of 2017, around $497 billion, according to the kingdom’s monetary authority.

The kingdom needs to maintain a large cushion of liquid reserve assets to maintain confidence and avoid a run on its currency, which is pegged to the dollar, and cannot afford reserves to fall too far.

However, the stabilization of reserve assets in 2018 masks a deterioration in the final three months of the year that extended into 2019 (tmsnrt.rs/2CJ2bCp).

Between September 2017 and September 2018, higher oil prices, foreign debt issues and strict controls on capital outflows boosted reserve assets from $485 billion to $507.2 billion, stemming the previous decline.

But the renewed fall in oil prices coupled with increased government spending and a relaxation of some austerity measures caused reserves to fall again by almost $23 billion between September and the end of February.

By the end of February, total reserve assets had fallen back to $484.6 billion, their lowest since April 2011 (“Monthly statistical bulletin”, Saudi Arabian Monetary Authority, March 2019).

Saudi Arabia still has significant unused credit capacity: external debt is low, and the kingdom has the ability to sell state-owned assets or borrow against the future revenue of national oil producer Saudi Aramco.

Asset sales and borrowing can smooth the transition and provide more time for adjustment, but the kingdom’s budget and external positions are not sustainable in the long term at oil prices below $70.

CLASHING GOALS

There is a direct contradiction between the president’s electoral strategy, which assumes prices below $70, and Saudi Arabia’s economic and political strategy, which needs prices well above $70.

This will create a persistent tension, at least until the next U.S. presidential election in November 2020, though both sides have a strong incentive to try to contain the friction to cooperate in other areas.

Saudi Arabia needs Trump’s support to pursue its war in Yemen and more broadly to isolate its regional rival Iran.

In turn, the president needs Saudi support to contain Iran and pursue a settlement of the dispute between Israel and the Palestinians.

Fundamentally, however, the relationship is an unequal one, and the White House expects Saudi Arabia to manage the oil market to ensure that oil prices do not rise too much.

In particular, the White House expects Saudi Arabia to increase its own output to offset any shortfall from Iran and Venezuela because of U.S. sanctions policies and will exert pressure on Riyadh to ensure it falls into line.

Trump has signaled he wants Saudi Arabia to offset lost Iranian and Venezuelan barrels fully even if prices remain below $70, while Saudi Arabia has signaled there is no need to offset lost barrels until prices climb higher.

For the time being, the tensions can be managed with some deft diplomacy, but they will get fiercer if prices climb above $75, the United States tightens sanctions on Iran significantly, or the global economy slows further.

reuters



8 Comments on "Trump and Saudi Arabia at odds over oil prices"

  1. Dredd on Sun, 31st Mar 2019 6:01 am 

    On a finite planet, the only way a finite resource such as oil can become infinite is through propaganda.” (Dredd, The Peak of The Oil Lies – 6)

  2. Robert Inget on Sun, 31st Mar 2019 10:27 am 

    Trump feels he needs to reassure his base he’s
    fighting to keep diesel and gasoline prices in check. This is why he increased sanctions on Venezuela and Iran.

    https://www.bing.com/news/search?q=Trump+Wants+Zero+Oil+Exports+From+Iran&qpvt=Trump+wants+zero+oil+exports+from+Iran&FORM=EWRE

    Venezuela;

    Venezuela Oil Exports Down 40% After Trump Sanctions …

    https://aminewswire.org/stories/venezuela-oil-exports-40-trump
    the Trump administration is significantly reducing oil exports from Venezuela, posing a major threat to the beleaguered socialist nation’s economy.

    Trump also plans to empty SPR to create a ‘glut’.

    https://www.washingtonpost.com/news/energy-environment/wp/2017/05/22/trump

    Not wishing to leave Mexico out, Trump is planning to Close the US/Mexican border this week. Let’s hope he doesn’t close the Canadian border before our brightest have a chance to leave while they can.

  3. Davy on Sun, 31st Mar 2019 11:42 am 

    “Trump also plans to empty SPR to create a ‘glut’.”https://www.washingtonpost.com/news/energy-environment/wp/2017/05/22/trump”

    WTF, bob, that was a 2017 article?? You are losing it.

  4. Davy on Sun, 31st Mar 2019 11:55 am 

    OK Robert, I get it now. Some people actually make plans farther out in the future then a few hours.

    Sorry for being such a dick again.

  5. JuanP on Sun, 31st Mar 2019 5:57 pm 

    Approximately 34% of attendees at President Trump’s Thursday night rally in Grand Rapids, Michigan were registered Democrats, according to Trump’s 2020 campaign manager Brad Parscale. Speaking on Saturday with Fox News’ Jesse Watters, Parscale explained that the campaign uses the phone numbers of attendees to look up their voter information. “We had tens of thousands of registrants, I believe 34% of the people who came to the Michigan rally were Democrats,” said Parscale, adding “Almost half had only voted once in the last four elections.” When asked if the campaign was still harvesting information on various demographics, Parscale said: “I’m harvesting nearly a million voters data information in key swing states every month.” “That must terrify the Democrats,” interjected Watters. “Yeah, we are – put it this way, we are four times ahead of where we were in 2016 and I plan on being 6 to 8 times ahead in data, that’s tens of millions of records.”

  6. eugene on Mon, 1st Apr 2019 9:40 am 

    Who isn’t Trump at odd with. We have a temper tantrum child for a president. The only thing that would make him more ridiculous is if he was stamping his feet as well. My read he represents tens of millions “adults” who are the same way.

  7. Robert Inget on Mon, 1st Apr 2019 12:51 pm 

    No one could have predicted this triple threat
    around short and long term oil pricing.

    1) Venezuelan crash to nearly zero exports.
    2) Rather serious Texas tank farm fire(s).
    Houston Ship Channel STILL slowed.
    3) Lower, but not yet visible, lower US production.
    4) News of Mexican negative export plight.
    5) Increased sanctions on Iran and Venezuela.
    6) Decreased sanctions on N. Korea.
    7) 285,000 fewer Saudi barrels p/d March.
    (Total production 9.82 B p/d)

    In any other circumstances, just one of listed
    may have caused today’s 3.44% price rise.

    8) Oil consumption W/W is over 100.3 MB p/d.
    Crude available, 97.9 B p/d

    At some point, be it emptying of LT reserves (SPR), Mid Summer this country faces serious
    shortages. My guess, we get super serious around NG and renewables.

  8. Robert Inget on Mon, 1st Apr 2019 1:16 pm 

    Davy, SPR was for dire emergencies.
    That was so in “17 and still is today.

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