It’s Nov. 5, one day before the U.S. midterm elections. Oil prices have climbed all year and now you’re paying US$75 to fill up your SUV. That makes you angry and you vote against the Republicans to punish Donald Trump, whose Twitter attacks against OPEC had utterly failed. OPEC “must get prices down now!” he had bellowed in September. Instead, they rose.
Rising oil prices ahead of the election, which will see all of the seats of the House of Representatives come up for grabs, and one-third of those in the Senate, are the Republicans’ nightmare, especially in the toss-up states. With less than three weeks to go before voting day, Mr. Trump must be praying that Saudi Arabia, the lead member of the Organization of Petroleum Exporting Countries cartel and the world’s top oil exporter, prevents prices from rising again. In the past year, oil has climbed 40 per cent, reaching US$81 a barrel for Brent crude, the international benchmark.
The Saudis may not be co-operative. On the weekend, Mr. Trump threatened them with “severe punishment” if conclusive evidence was found that the Saudi regime was behind the disappearance, and presumed death, of Saudi journalist and Washington Post columnist Jamal Khashoggi. Within hours, the Saudis issued their own threat, insisting that any punishment, including economic sanctions meted out by foreign governments, would be met with “greater action.”
Translation: The Saudis could enact production cuts, or an outright export embargo, that could send oil prices soaring. OPEC used precisely that strategy in 1973 and 1974, when it scaled back exports to any country that had backed Israel in the 1973 Yom Kippur War, which had gone badly for the Arab coalition.
As if to prove the point that they were not joking, Turki Aldakhil, the head of the Saudi news site Al Arabiya, warned that any economic sanctions would have dire consequences. Writing in the news outlet, which is considered a mouthpiece for the Saudi royal family, he said sanctions would trigger production cuts creating “an economic disaster that would rock the entire world,” and predicted that oil could jump to US$100 or US$200, “or even double that figure.”
But oil prices didn’t shoot up after the Saudis vowed to meet any retaliation with retaliation; they were flat. On Wednesday, oil futures turned negative. The fear factor is clearly absent from the oil market. This time, at least, it appears markets think the Saudis will avoid using oil as a weapon of mutually assured economic destruction. But that’s not to say that oil prices, after the election, won’t rise. A flurry of economic and geopolitical factors are conspiring to push the price up, if not just yet.
Saudi Arabia’s oil-embargo threat appears to be dying because Mr. Trump’s “severe punishment” threat appears to be dying. The President raised the “rogue killers” scenario for Mr. Khashoggi’s reported assassination in an apparent attempt to deflect blame from the regime. As he warned the country’s many critics not to rush to judge the Saudis before evidence is collected, Secretary of State Mike Pompeo, all smiles, met with King Salman, Crown Prince Mohammed bin Salman and the Saudi Foreign Minister. He emerged with a promise from them, he said, that they would carry out a “thorough, complete and transparent investigation” into the Khashoggi affair.
As long as Mr. Trump and his lieutenants are rushing to protect the Saudi regime, as it appears they are, sanctions against Saudi Arabia, and retaliatory moves by the Saudis, are only a scant possibility. The oil price says as much. And there is little doubt that the Saudis would rather see the Republicans win the midterm elections than the Democrats. Fill-ups are unlikely to get more expensive between now and Nov. 6.
After the election, all bets are off. In spite of the warming planet, calls for carbon taxes and the advent of the electric car, oil consumption continues to rise. OPEC has predicted that demand will rise by 7.3 million barrels a day between 2017 and 2023. Yet, big new discoveries are exceedingly rare, productive oil fields are running out of puff, and investment in exploration and development plunged in 2015 and 2016, when oil prices sank. U.S. shale oil production has surged in recent years, but more increases will be hard to achieve.
There is more bad news for oil consumers. Saudi Arabia doesn’t have to drop its own production, now at about 10.7 million b/d, to see prices rise. All it has to do is maintain production levels as Venezuela’s output drops and the U.S. embargo against Iran kicks in. Already, Iranian exports are waning. S&P Global Platts reported they fell to 1.7 million barrels a day in September from 1.9 million in August.
They are bound to fall further. Some oil executives think Iran or its proxies could engineer a little slowdown in southern Iraq, where it has a lot of influence, that would take some Iraqi oil production off the market, all the better to raise prices. That would allow Iraq to protect its oil cash flows even as its export volumes fall. In that scenario, US$100 oil, or higher, is not out of the question.
Mr. Trump is working hard to keep oil prices from spiking ahead of the election and his gambit may work. But in the next year or two, the US$75 fill-up may look like a bargain.
Eric Reguly