There was never really a good reason for Saudi Arabia to comply with the wishes of U.S. President Joe Biden to increase oil production to lower prices for oil-consuming nations. Still, the possibility that OPEC+ would raise production in response to pressure from the White House was portrayed as a legitimate possibility in the media.
But OPEC+--largely influenced by its two largest producers, Saudi Arabia and Russia—is looking at a longer-term view.
Aside from the long-term view of oil supply and demand—which Saudi Arabia in particular sees as swinging back into surplus early next year—Saudi Arabia seems to be enjoying the high life on the back of higher oil prices over the last few months. As demand has not balked at these high prices, Saudi Arabia et al have little motivation to heed the calls of the White House to alleviate its own political woes courtesy of high retail gasoline prices.
And now, as of Friday, oil prices are crashing—and they are crashing spectacularly. Leading up to OPEC+’s next meeting that will decide the fate of its future oil production, plummeting prices is only going to pressure the group to further curtail production—instead of increasing production as President Biden had hoped.
Prices are not crashing because of President Biden’s announced release of 50 million barrels from the Strategic Petroleum Reserves, which hasn’t even happened yet. Although we expect the administration will take a victory lap regardless.
It’s about another new strain of Covid and several consequential travel limits instituted this week.
It was exactly as Saudi Arabia has warned: Covid 19 adds an unknown element to the market, and we shouldn’t be too hasty in production ramp ups or the wheels could fall off the market. They were wise to tread cautiously.
Saudi Arabia’s Production
Saudi Arabia’s production has come a long way this year. Marred by the Covid-saturated market and its oil price war with Russia, The Kingdom’s production had sagged to 9.182 million barrels per day in 2020. The latest Monthly Oil Market Report data shows that its production has gained significant ground—to 9.759 million bpd. This is remarkably close to the 9.794 million bpd produced in 2019.
For Saudi Arabia, who relies heavily on oil money, this translates into prosperity, particularly at higher oil prices.
According to Bloomberg calculations, Saudi Arabia is on track to earn the most money in eight years off the back of pumping oil—rivaling the some of the highs seen in the 2011-2014 period of prosperity when oil prices were above $100 per barrel. While these calculations were based on Saudi Arabia producing 10.3 million bpd and Brent averaging $80 next year, it’s easy to see how the $300 billion revenue mark isn’t out of the question.
That is, unless oil prices continue to crash.
It is for this reason that Saudi Arabia isn’t keen on raising output just yet, least of all at the behest of President Biden, who has, according to Bloomberg, refused to speak to Crown Prince Mohammed bin Salman after a U.S. intelligence report fingered the Crown Prince as being behind the murder of Jamal Khashoggi in 2018.
Now normally, there is some demand destruction expected at high prices. But we haven’t really seen this. Even though oil-consuming nations are bemoaning high crude oil prices and moving to release barrels from the SPR, the release will have little effect on OPEC+ demand—certainly not from the United States.
Instead, we have seen a steady increase in demand despite the steady increase in price, strengthening Saudi Arabia’s position in the market.
The U.S. vs. Other Heavy Oil Consumers
There will certainly be little—if any—demand destruction in OPEC+ crude from the United States.
The United States is situated differently than other major oil consumers such as China, India, Japan, and South Korea. While it is the largest oil-consuming nation in the world, it produces much of its own crude. The United States exports some of this crude and imports some, depending on prices and the grades that refineries are best inclined to process.
There is an unfortunate tendency for those outside the oil market to oversimplify the supply and demand situation in the United States. Some would say the United States is self-sufficient when it comes to energy, others would say we are too reliant on foreign oil and U.S. shale should ramp up production and stop exporting so much crude to other nations.
According to the Energy Information Administration, the United States produces an average of 11.5 million bpd of crude oil every day—this is down from a high of 13.1 million bpd last year. It consumes 18.2 million barrels per day of crude, and exports 2.9 million bpd.
The production, import, and export picture for crude oil (and not oil products) as of August looks like this, according to EIA data:
The top source for U.S. crude oil imports is Canada—which, although obviously foreign, is not what many are referring to when they lash out at the United States for its reliance on crude from abroad. The United States imported an average of 4.13 million bpd of Canadian crude oil in 2020.
The second largest supplier of crude to the United States is Mexico. From Mexico, although securing the number two spot, the U.S. brought in just 550,000 barrels per day. Between Canada and Mexico, 70% of the United States’ crude export needs are met.
Then there are the Saudi Arabias and the Russias, do indeed export crude oil to the United States. This is the factoid that is often bandied about in the news media, but without context or figures. Russia, the third-largest exporter of crude to the United States, supplies just 540,000 bpd, while Saudi Arabia supplies 520,000 bpd. These figures aren’t trivial, but perhaps their importance is unnecessarily magnified to make a point about the U.S. reliance on these foreign sources.
Those figures were from 2020. As of August 2021, the figures are even smaller.
Meanwhile, China must import nearly 11 million barrels per day, and India must import 85% of the crude oil it consumes. And they import a significant amount of OPEC+ crude.
That’s not to say that the United States isn’t influenced by OPEC+’s decisions. Any movement in the price of Brent also moves the price of the U.S crude grade WTI.
And both are moving today.
OPEC+, led in large part by Saudi Arabia, will meet next week to discuss the plan for production. If they do indeed change their plans as rumors have suggested—whether it is because of anticipated demand drop off courtesy of the latest covid wave or whether it is in response to Biden’s coordinated release of crude from the SPR along with other nations—it will be seen by the market as retaliatory.
But there is little doubt that a 10% dip in the price of Brent will prompt OPEC+ to at least pause the production increases or even cut production. And why not also relish in the opportunity the market has just handed OPEC+ to simultaneously stick it to President Biden.
By Julianne Geiger for Oilprice.com