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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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U.S. Accelerates Three-Tier Plan To Reduce Oil Prices

  • U.S. President Biden has three key strategies in place to lower oil prices.
  • The first and foremost strategy is the implementation of the NOPEC bill.
  • The second pillar of the plan is to release more crude from the U.S. SPR.
  • The third element of the plan to bring oil prices down is to be a concerted effort to encourage U.S. oil firms, shale or otherwise, to increase their production.
Shale rig

The immediate aftermath of the 1973/74 oil embargo in which Saudi Arabia led its OPEC brothers to block oil exports to the U.S., the U.K., Japan, Canada, and the Netherlands - causing oil prices to spike from around US$3 per barrel (pb) to nearly US$11 pb and stoking the fire of a global economic slowdown in the West – was that geopolitical relations between the two sides would never be the same again. The architect of this watershed moment in the history of the global oil sector, Saudi Arabia’s then-Minister of Oil and Mineral Reserves, Sheikh Ahmed Zaki Yamani, himself highlighted that the embargo 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. From that point in 1974 when the oil embargo ended, the U.S. clearly understood that it could no longer trust Saudi Arabia, that the cornerstone 1945 agreement between the U.S. and Saudi Arabia was no longer valid, and that it needed to end any dependence it had on Saudi Arabia as soon as possible, as analysed in depth in my new book on the global oil markets. The opportunity to do so came with the rise of the U.S.’s shale oil industry, which – recognising the danger to its power that is solely centred on oil – Saudi Arabia has sought to stymie through two further oil price wars, one that ran from 2014 to 2016, and the next that occurred in the first half of 2020. U.S. President Joe Biden has since throttled back on the further development of the U.S. shale oil industry, preferring instead to embrace unclear transition plans to a greener energy future. However, with Saudi Arabia’s clear attack again on the U.S.’s economic and political interests, in the shape of the 2 million barrel per day (bpd) collective cut in oil production by itself and its OPEC brothers, it appears that the blinkers have been removed from the U.S. President, and moves are afoot again to allow the U.S. to cut all ties to Saudi Arabia, and leave it at the mercy of other regional and global powers. Related: Gas Price Crisis Overshadows A Crisis In Oil Prices

Having been humiliated, both as the president of the U.S., and as a man, first by Saudi Arabia’s Crown Prince Mohammed bin Salman (MbS) refusing to even take a telephone call from him during which he was to ask for help in bringing economy-wrecking high oil prices down, and then by MbS doing the direct opposite to what he asked for during his personal visit to Saudi Arabia in July, Biden has three key strategies in place to lower oil prices. The first of these is the enactment of the ‘No Oil Producing or Exporting Cartels’ (NOPEC) bill – that has been covered by me in OilPrice since 2019 - but was fired up again in the aftermath of the extraordinary oil production cut by OPEC. Analysed again in full in the last two weeks, it is sufficient to say here that if and when the Bill is enacted, then Saudi Aramco would either have to be broken up into much smaller constituent companies that are not capable of influencing the oil price, thus reducing the company’s net worth to zero overnight, or face the full force of the U.S.’s antitrust laws, and similar laws from all of the U.S.’s allies. In addition to all of this, the NOPEC Bill immediately removes all sovereign immunity that presently exists in U.S. courts for OPEC as a group and for its individual member states – including, Saudi Arabia. According to legal sources in Washington familiar with the legislation and spoken to by OilPrice.com last week, this would open up Saudi’s US$1 trillion or so of assets in the U.S. to be seized in lawsuits relating to a range of allegations, including Riyadh’s role in the ‘9/11’ terrorist attacks on the U.S. 

The other two elements of Biden’s new Saudi strategy are designed not directly to destroy the power of its flagship company, Saudi Aramco, or MbS, quickly but rather in a slower fashion - the death of a thousand (oil price) cuts, it might be said – so that oil rests in the US$40-75 pb of Brent range that the U.S. historically sees as optimal for the economies of itself and its allies. The first of these elements will be the continuation of releases of crude oil from the U.S.’s Strategic Petroleum Reserve (SPR), according to comments from the U.S. Department of Energy in recent days. In line with the previous regular SPR releases instigated to bring oil prices down, there will be the last in this series of releases for delivery in December, with up to 15 million barrels of crude being sold from the SPR. Such releases will not end with the current program, though, according to senior Biden administration officials on 18 October, with Biden himself stating: “I’ve told my team behind me here to be prepared to look for further releases in the months ahead if needed,… We’re calling it a ready and release plan. This allows us to move quickly to prevent oil price spikes and respond to international events.” Although other factors have been at play at one time or another since Russia’s invasion of Ukraine sparked the early oil price spikes, the historic 1 million bpd release from the U.S.’s SPR over a six-month period has been remarkably effective in dampening down oil prices from the US$100+ pb levels that they might otherwise have been.  Related: Macron Lashes Out At United States Over Double Standard Energy Policies

The third element of the plan to bring oil prices down is to be a concerted effort to encourage U.S. oil firms, shale or otherwise, to increase their production. Back in March, U.S. Energy Secretary Jennifer Granholm said that Biden’s administration had already started taking steps that should result in a ‘significant increase’ in domestic energy supply by the end of this year. Progress on those efforts has been slowed by the cascade of other events surrounding Russia’s ongoing war against Ukraine, but Granholm’s comments did underline that the green energy rhetoric of Biden’s early presidency was beginning to make way for action based on the cold hard fact that high oil and gas prices damage the U.S. economically and are catastrophic for the re-election chances of sitting presidents and their parties. According to Granholm in March, the U.S. was working to identify at least 3 million bpd of new global oil supply, with assurances from several high-level oil and gas executives that their companies were set to dramatically increase investments and bring online new rigs. 

A fourth element of the plan as announced last week, although the least likely to succeed in any meaningful way given the resistance of Western oil companies to the notion of ‘windfall taxes’ in any guise, is to pressure oil companies to pass savings on to consumers. “The profits that energy refining companies are now capturing on every gallon of gas is about double what it typically is at this time of year, and reseller margins over the refinery price are more than 40 percent above typical level,” a Biden administration official said. “The president will reiterate that outsized profit margins are inappropriate, especially at a time of war, and will call on companies to pass their savings through to consumers,” he added.

By Simon Watkins for Oilprice.com

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  • Mike Lewicki on October 25 2022 said:
    1. SPR inventory level seems low for energy security.

    2. NOPEC and break up of Aramco would increase oil prices dramatically.

    3. Oil and Gas EP firms are not government owned instead they are owned by investors. We want share buybacks, dividends and debt elimination.

    $40 to $75 WTI prices will see less oil rigs and less supply!
  • Mamdouh Salameh on October 26 2022 said:
    President Biden and his administration are deliberately ignoring the fact that high crude oil prices are the result of a global oil market at its most bullish state since the oil price collapse of 2014, a robust global oil demand and a fast-shrinking global spare production capacity including OPEC+’s all of which are underpinned by global underinvestment in oil and gas prompted by Western green policies.

    Against this background, President Biden’s is trying unsuccessfully and futilely to shift the blame for his failure to stem the rise in crude prices in general and gasoline prices in the US, to OPEC+ and particularly Saudi Arabia. He is now facing the reality that his party, ‘the Democrats’ will probably lose the midterm Congressional elections in November and that he could probably end his political career as a one-term president.

    Moreover, his three-tier plan to reduce oil prices is doomed to fail. His first strategy of invoking the NOPEC Bill is hot air as I explained to him repeatedly in my comments on his articles. Any attempt to sue OPEC+ members including Saudi Arabia will be far more damaging to the United States’ financial system and economy than any damage inflicted on OPEC+ members. This will come in the form of replacing the petrodollar by the petro-yuan leading to a 60% loss of global oil trade and a devaluation of the dollar by one quarter to one third of its current value.

    The second strategy of a continuation of SPR releases will hardly lead to lower oil prices as evidenced by the fact that a release of 180 million of SPR barrels (mb) along with 60 mb of IEA’s stocks have hardly managed to reduce Brent crude by $5-$6 a barrel. Even if President Biden empties the SPR, the impact on prices couldn’t exceed another $2-$3 a barre. Once these stocks have been depleted, there will be very dangerous shortages in the market with prices reaching levels far beyond $150 a barrel. Furthermore, it will be virtually impossible for the US to refill the SPR neither from US shale oil which is a spent force incapable of raising its production nor from a tight global oil market.

    The third strategy of refilling the SPR with Brent crude prices ranging from $67-$72 a barrels is a pipe dream. Brent crude could end the year at $110 a barrel.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • ROBERT SCHELLY on October 26 2022 said:
    Mike, agreed. This trifectate plan is accelerating to the round file.

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