Elephants in the Room
Trump Is Right to Target Saudi-Russian Collusion
Moscow and Riyadh are conspiring to rig global oil markets against the United States.
For those who want to see what a real case of Russian collusion looks like, check out what has been happening in global oil markets for the past year and a half. In late 2016, Russia and Saudi Arabia conspired to cut supply and raise prices. With cooperation from the rest of OPEC, they’ve succeeded spectacularly. Prices that had plummeted below $30 per barrel have been steadily rising in the wake of the Saudi-Russian pact to throttle back production, hovering recently at around $70 a barrel.
It could get worse. On his recent tour of the United States, Saudi Crown Prince Mohammed bin Salman announced that the kingdom’s goal was to extend its scheme to manage prices with Russia for another 10 to 20 years. The Saudi oil minister has suggested that OPEC and the Russians will continue tightening the market even though they’ve already succeeded in drying up a massive glut in global crude inventories. Saudi officials who just a few months ago were speaking of $70 as their target ceiling for prices now suggest that it may instead be the floor. They’ve apparently got their eye on $80, with plenty of talk that a return to $100 might be desirable.
All of this proved too much for U.S. President Donald Trump. As the Saudis were hosting OPEC and the Russians at a meeting this month to admire their market manipulation handiwork, the president let loose a shot across the bow. “Looks like OPEC is at it again,” he tweeted, blasting the cartel for artificially inflating prices. “No good and will not be accepted!”
My gut tells me that the president is on to something. The U.S. oil industry might benefit from steadily rising prices, but the costs to other important U.S. interests could be prohibitive. They’re certainly worth considering — as is a strategy for mitigating national vulnerabilities.
Hurting U.S. consumers
Trump’s chief concern was almost certainly the economic impact of higher energy prices on U.S. consumers. Drivers will be paying more for a gallon of gasoline this summer than at any point since 2014. Estimates suggest that on average U.S. households will spend $400 more at the pump in 2018 than just two years ago. That could significantly erode the stimulus effect of Trump’s recent tax cuts and even negate the benefits entirely for low-income households. While there is probably a sweet spot where higher prices bolster the U.S. energy sector without curtailing consumer spending, Trump’s tweet on April 20 clearly suggests that he doesn’t trust the Saudis — and certainly not the Russians — to be reliable stewards of America’s economic health. Rightly so.
Strengthening Russia and Iran
The geopolitical effects of higher prices are also worrying. Maybe this is an oversimplification, but the idea of doing anything that would invariably end up strengthening the oil-dependent economies of both Russia and Iran, two of America’s most dangerous international adversaries, should be deeply troubling. It’s hard to view a scheme as benign if it guarantees more cash for Russian President Vladimir Putin and Iranian Supreme Leader Ali Khamenei to threaten vital U.S. interests.
Strangely, this comes from a Saudi regime that blithely claims that Iran’s supreme leader, if not stopped, will prove more dangerous than Adolf Hitler. Even setting aside the hyperbole, the long-standing Iranian project to destabilize and take down the House of Saud is real and pressing — as is the Iranian origin of many of the 100-plus missiles that Houthi rebels in Yemen have rained down on Saudi cities and installations in the past few years.
Russian military firepower has also joined in a murderous alliance with Iran’s Islamic Revolutionary Guard Corps in Syria to prop up Bashar al-Assad’s genocidal regime, kill hundreds of thousands of Saudi Arabia’s Sunni co-religionists, and put Iran on the threshold of dominating the Levant.
Rattling oil markets
At a more tactical level, the timing of Saudi messaging about higher prices is also deeply problematic. It’s no secret that in the run-up to Trump’s May 12 decision on the Iranian nuclear agreement, the Saudis have been calling for the deal’s collapse and the reimposition of powerful U.S. sanctions. That would mean targeting Iranian oil exports and potentially removing 1 to 2 million barrels of crude from international markets in short order.
Opponents of such a move are likely attempting to deter the administration by warning that it could result in a dangerous price spike and downturn in the world economy. Now is precisely the time that the United States needs the Saudis to calm markets by reassuring everyone that Riyadh has both the resolve and capacity to cover any loss of Iranian exports. Instead, their most senior officials have been blathering on about the merits of tightening the market further. As the president might say, “Not nice or smart!”
Undermining Saudi reform
Of course, it makes sense that the Saudis might be attracted to a deal that promises to resurrect their market power over oil prices. For one, they’re suggesting that higher prices will help pay for Mohammed bin Salman’s ambitious economic modernization initiatives, ensure the highest possible valuation for Saudi Aramco’s upcoming public offering, and finance the escalating costs of their war in Yemen.
On the one hand, I might be willing to buy it. I’m a big supporter of Mohammed bin Salman’s sweeping domestic reforms. But managing these historic changes will require money, and a full-blown collapse in oil prices could dangerously undermine that process.
On the other hand, there is an even stronger correlation between the prospect of lower oil prices and Mohammed bin Salman’s Saudi Vision 2030. The crown prince is only doing what he’s doing because he believes that absent radical reform and economic diversification, the House of Saud is in grave danger. It’s precisely the economic pressure of declining oil prices that propelled this sweeping modernization agenda in the first place. If the Saudi-Russian pact alleviates those pressures, or breathes new life into the argument that the old rentier-state model remains viable, it could undermine the imperative to reform.
It’s hard to see how a deal that grants Putin and Russia greater leverage over global oil markets would serve long-term U.S. interests. Trump was right to raise the issue in his tweet — though it should have been part of his administration’s dialogue with the Saudis since day one.
Mohammed bin Salman has been desperate for U.S. help not only to manage the Iranian threat abroad and economic modernization at home but also to legitimize his brazen bid for absolute power within the royal family. In exchange for that help, the United States ought to be continuously pressing its own set of concrete demands with the Saudis, including combating the ideology of jihadism, containing Iranian aggression, and, yes, not colluding with Putin on a scheme to manipulate global oil markets. It’s high time the president’s agenda with the Saudis moved beyond the endless quest to sell them ever greater quantities of advanced weaponry that they really don’t need and can’t effectively use.
Beyond the U.S.-Saudi bilateral context, of course, the United States should be pursuing a long-term strategy to maximize its own energy security. It makes sense to incentivize and expand the current oil boom, but the United States also needs a strategic initiative to erode oil’s continued stranglehold on its transportation sector. That means encouraging readily available alternative fuels that could compete with gasoline — electric power, to be sure, but also ethanol from abundant supplies of U.S-sourced natural gas, corn, and agricultural waste. Ultimately, devaluing oil itself and downsizing the role it plays in the free world’s economy is the best way for the United States to deal with the risks posed by Saudi-Russian collusion.