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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Saudi Arabia New Output Cuts Threat Is Another Blow To Washington

  • Saudi Arabia’s Energy Minister said that OPEC+ may consider a new round of output cuts.
  • U.S. influence in the Middle East is losing influence in the Middle East at the expense of Russia and China.
  • For Saudi Arabia, cutting all but the most essential links to the U.S. will also allow it to keep oil prices high.
Saudi US flags

Saudi Arabia’s threat last week to lead the Organization of the Petroleum Exporting Countries (OPEC) into a concerted cutting of its collective crude oil production – which would lead to even higher prices over a longer period – marks the end of the U.S.’s and the West’s Middle East dream. This dream, as analysed in my new book on the global oil markets, began in earnest on 26 May 1908 when an oil drilling team led by British geologist, George Reynolds, struck oil at Well No. 1 at the Masjid Sulaiman field in Persia (partly now modern-day Iran). The 28 May 1901 concession for Reynolds’ employer – William Knox D’Arcy - to explore, drill, produce, and export petroleum in Iran (excluding five northern provinces close to Russia) for a period of 60 years, included the provision that Persia was to be given £20,000 in cash, £20,000 in shares from the company that operated the concession, and 16 percent of the profits made by the first or any other company formed by this concessionaire. Shortly after the Masjid Sulaiman discovery, the Anglo-Persian Oil Company was founded, and in 1914, a 51 percent stake in the company was bought by the UK government, and in 1954 it changed its name to the British Petroleum Company. At around the same time, Mohammad Mosaddegh, the highly popular prime minister of Iran, nationalised the UK company’s Iranian infrastructure assets, and renamed the new entity the National Iranian Oil Company (NIOC). Shortly after this, a military coup organised jointly between the UK’s Secret Intelligence Service (SIS) and the U.S.’s Central Intelligence Agency (CIA) codenamed, respectively, ‘Operation Boot’ and ‘Operation Ajax’, removed Mossadegh from power, which enabled Shah Mohammad Reza Pahlavi to increase his hold over the country, backed particularly by the U.S. and the UK. A similar tale unravelled in Saudi Arabia, the concession deal for which made Iran’s pre-1951 oil profit share of 16 percent look positively generous.  To secure the exclusive rights to explore, drill, produce, and export petroleum across the entirety of Saudi Arabia, the U.S.’s Standard Oil made a single payment of US$275,000 in April 1933 (equivalent to just over US$6 million now) to the Kingdom. Related: European Gas Prices Plunge As Germany Fills Storage Ahead Of Schedule

For Middle Eastern countries, these facts - to this day – are still well known and inform their view on dealing with the West, which has long been regarded by them as being an occupier of the region simply to exploit its oil and gas resources for as little outlay as possible. The first few signs of widespread and concerted action by Middle East states to counter what they regarded as the West’s stranglehold over their natural resources came with the formation of the United Arab Republic union between Egypt and Syria from 1958 to 1961, the formation of OPEC in 1960, the series of conflicts with neighbouring Israel over the period, and then the 1973/74 Oil Embargo. During this embargo, effectively the first ‘Oil Price War’, as also analysed in depth in my new book on the global oil markets, OPEC members plus Egypt, Syria and Tunisia began to block oil exports to the U.S., the UK, Japan, Canada and the Netherlands. This was in response to the U.S. supplying arms to Israel in the Yom Kippur War that it was fighting against a coalition of Arab states led by Egypt and Syria. The spiking effect in oil prices was exacerbated by incremental cuts to oil production by OPEC members over the period and by the end of the embargo in March 1974 the price of oil had risen from around US$3 per barrel (pb) to nearly US$11 pb and then it trended higher again. Saudi Arabia’s then-Minister of Oil and Mineral Reserves, Sheikh Ahmed Zaki Yamani – widely credited with formulating the Embargo strategy – highlighted that it marked: “A fundamental shift in the world balance of power between the developing nations that produced oil and the developed industrial nations that consumed it.” 

This history and these ideas are precisely where the global oil and gas market is now, and exactly the reason why Saudi Arabia’s current Energy Minister, Prince Abdulaziz bin Salman, said what he did about OPEC being ready to cut crude oil production and, by extension, see oil prices rise higher for longer. For decades, this strain of petro-nationalism had been largely muted by the agreement struck back on 14 February 1945 at a meeting between the then-U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz. The deal that they agreed – which had been the basis for all the U.S.’s Middle East policy up until very recently - was this: the U.S. would receive all the oil supplies it needed for as long as Saudi had oil in place, in return for which the U.S. would guarantee the security both of the ruling House of Saud and, by extension, of Saudi Arabia. From the U.S. side, this deal was significantly undermined by the launch of the 2014-2016 Oil Price War by the Saudis, which was intended to destroy or disable the then-nascent U.S. shale oil sector. From the Saudi side, the key initial turning point came with the U.S.-sponsored ‘nuclear deal’ for its historical nemesis and great regional power rival, Iran. Behind-the-scenes moves towards this deal began at around the same time as the onset of the 2014-2016 Oil Price War, with the deal agreed in 2015 and implemented in 2016.

Related: The World’s Energy Problem Is Far Worse Than We’re Being Told

It is also this history and these ideas that are being used by Russia and China to stoke further discontent within the region. Russia’s foreign policy broadly is to create chaos and then to project Russian solutions, and therefore power, into that chaos, and China’s broad foreign policy under its multi-generational power-grab ‘One Belt, One Road’ program is to project money, and therefore power, into that same chaos. Ironically, as also analysed in depth in my new book on the global oil markets, it is a strategy that both countries copied from the U.S.’s National Security Advisor (January 1969 to November 1975) and Secretary of State (September 1973 to January 1977), Henry Kissinger. A brilliant geopolitical strategist, Kissinger was one of several U.S. politicians who understood that the 1973 Oil Embargo had marked a fundamental shift in the world balance of power, just as Sheikh Yamani had said, and wanted to make sure that it never happened again. Without having sufficient quantities of oil itself, the U.S. had little option but to continue to deal with Middle East countries but, he reasoned, the U.S. could exert influence over them if they could be weakened through their division. This division could be done across nationalistic lines, as was highlighted by the U.S. sponsorship of the 1979 Egypt-Israel Peace Treaty, which caused chaos in the Arab world, as did the subsequent assassination in 1981 of the Egyptian President who signed the deal, Anwar Sadat. Or it could be done intra-nationally (and intra-regionally) through the stoking of religious sectarian tensions in key target countries, such as Iraq and Syria most notably in recent times. Kissinger’s policy of ‘constructive ambiguity’ is now being used by Russia and China but with the twin aims of enhancing their hydrocarbons power (through greater access to supply and distribution, and therefore, pricing) and of turning the Middle East against the U.S. and the West (using those historical pre-conceptions of the Arabs mentioned above). 

Given the clever use of Kissinger’s strategy against the U.S., there is no reason to believe that the ongoing shift in the Middle East towards the Russia-China axis of influence will not continue apace. Since the U.S.’s withdrawal from the Iran ‘nuclear deal’ in 2018, its withdrawal of troops from Syria (2019), former President Donald Trump’s ‘ending endless wars’ speech (2020), its full withdrawal from Afghanistan (2021), and  the end of the combat mission in Iraq (2021), there have been a slew of massive and multi-faceted deals, often weekly, between Middle East countries and either Russia or China. Most notably, perhaps, in all of these are those involving Saudi Arabia. These have been building in significance and intensity ever since Russia came to its aid at the end of the 2014-2016 Oil Price War to bolster the then-shattered influence and reputation of Saudi Arabia and OPEC, to form ‘OPEC+’. These Russian moves have been augmented on China’s part by what Saudi Crown Prince, Mohammed bin Salman, still regards as a huge personal favour offered to him by Beijing in order to allow him to save face over his disastrous plans to float Aramco. For Saudi Arabia, cutting all but the most essential links to the U.S. will also allow it to keep oil prices high – exactly where it wants and needs them for its own financial and geopolitical benefit – and not to be beholden either to the U.S.’s (or the West’s) economic or political imperatives for keeping energy prices lower than where they are now. 

By Simon Watkins for Oilprice.com

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Leave a comment
  • Keith Mcmaugh on August 30 2022 said:
    Xi is meeting with MbS this month, what are they meeting about??
    Russia and China wants to replace USA influences in Saudi Arabia but also wants to use Iran to counter act American power.
    Because Iran and Saudi Arabia are always in conflict, Russia and China would have tremendous difficulty. The future of this Middle East is fascinating.
  • One Second on August 30 2022 said:
    Yeah, yeah, the good old hydrocarbon power games. The only way to win it for the industrialised nations is to stop playing it and provide the needed energy for themselves with renewables.

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