U.S./Saudi Oil Production Spat: Family Feud or Voted Off the Island?

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--If the current energy situation were a game show, the prize for the U.S.' current ruling party would be maintaining its status with midterm elections looming. For the world's top exporting country, Saudi Arabia, the stakes are larger--world energy balance.

No matter which political party is in power, it is always in that group's interest to reduce pump prices at election time. To wit, this CNBC headline from June 30, 2018--another midterm election year: "Trump, Saudi king agree to production boost to battle rising oil prices, and offset Venezuela, Iran supply woes." The immediate issue there was announced as solving supply losses, but those things are less tolerable for certain parties in certain seasons.

To boost supply and reduce prices, the Biden administration on October 18 announced the release of 15 million barrels from the Strategic Petroleum Reserve (SPR), a sale that was completed the next day for December delivery. The announced cause was the interruption of Russian oil due to its invasion of Ukraine. That completes the 150 million-barrel release announced last spring. Four days earlier, the EIA announced the SPR's stockpile was already down to just 405 million barrels, "the lowest inventory level the SPR has held since June 1984."

What is the purpose? A July White House briefing says this about previous SPR releases: "Treasury Department Estimates that Strategic Petroleum Reserve Releases by President Biden and International Partners Reduced the Price of Gasoline by up to 40 Cents Per Gallon."

So the decision of OPEC+ to start production cuts of 2 million barrels per day (BBL/d) in November, which will likely raise prices back up and could discourage voters from maintaining the status quo, did not resonate well in Washington. The U.S. president has threatened unnamed "consequences" should the production drop be implemented. This warning, in turn, prompted Saudi Arabia's energy minister, Prince Abdulaziz bin Salman, on Tuesday to point out that releasing emergency stocks to manipulate prices is a bad idea, when the purpose of the stockpiles is to prevent supply shortages.

And the prince is maintaining that his is the higher ground. At Tuesday's start of the Future Investment Initiative (FII) conference in Riyadh, Saudi Arabia, he said of the future of the two nations' interaction, "I think we as Saudi Arabia decided to be the (more mature) guys and let the dice fall. I keep hearing are you with us or against us? Is there any room for we are for Saudi Arabia and the people of Saudi Arabia," he said.

Noting that the Saudis deal with more than just the United States, several officials have expressed confidence that any differences between the two countries can be patched up.

Saudi Investment Minister Khali Al-Falih called the dust-up "a blip" at the FII conference, adding, "We're close and we're going to get over this recent spat that I think was unwarranted, and it was a misunderstanding, hopefully."

JPMorgan Chief Executive Officer Jamie Dimon agreed with the Saudi view, saying, "I can't imagine any allies agreeing on everything. They will work it through and I'm comfortable folks on both sides are working through and these countries will remain allies going forward."

Dimon added, "The American policy doesn't have to be, 'Everything our way.'"

SPR's Purpose: To Win Elections or to Survive Supply Emergencies?
The U.S. Energy Information Administration's (EIA) website lists the purpose of the Strategic Petroleum Reserve (SPR) as follows: "The SPR was established in the 1970s to reduce the effects of unexpected oil supply reductions. The reserve was designed to hold up to 714 million barrels of crude oil across four storage sites along the Gulf of Mexico, where much of the U.S. petroleum refining capacity is located. One of the SPR's core missions is to hold enough oil stocks to fulfill U.S. obligations under the International Energy Program, the 1974 treaty that established the International Energy Agency (IEA)."

Over the almost 50 years of the SPR's existence, most releases have indeed been for emergencies such as hurricanes, according to Department of Energy statistics. In 1990, there was a Desert Shield release, followed by a 1991 Desert Storm release.

There also is a plan in place for restocking the SPR whenever the benchmark West Texas Intermediate (WTI) prices drop to the range of $67 to $72 per barrel. Should the price drop this low, it would possibly serve to raise prices slightly, pleasing oil producers.

In recent years, the purpose of the SPR seems to have expanded from just energy security, to include political security.

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