Elephants in the Room
A Deal to Stop the Saudis From Drowning U.S. Shale Would Come None Too Soon
Trump has finally realized the U.S. energy industry is under attack. Better late than never.
Saudi Crown Prince Mohammed bin Salman’s decision to launch an oil price war in the middle of a catastrophic global pandemic was a decidedly unfriendly act toward the United States. It threatens to lay waste to an American shale oil industry that over the past decade has become a critical pillar of U.S. economic growth and national security.
On Thursday, U.S. President Donald Trump told CNBC that Saudi Arabia and Russia had agreed to cut oil production. Whether a deal has actually been reached remains to be seen—Saudi Arabia has denied any plans to cut. But Trump has belatedly realized that salvaging the wreckage of a U.S. oil industry pummeled by the price collapse should be one of his highest priorities.
The Saudis moved to drown the markets in oil in early March, after Russia rejected Riyadh’s proposal to support global oil prices with a fresh round of production cuts. The Russians claimed, not without justification, that the primary beneficiary of Saudi-Russian restraint since 2017 has been the U.S. shale oil industry, which took advantage of elevated prices to increase production and seize market share.
Spurned by Moscow, Mohammed bin Salman reversed strategy overnight—from cutting supplies in order to stabilize prices to flooding the market in order to crash them. The Saudis cut prices while pledging to dump an additional 2.5 million barrels per day on already-glutted markets. Oil prices immediately posted their biggest losses in 30 years and, by late March, had cratered by more than 60 percent from their level in late 2019.
Explanations for Mohammed bin Salman’s head-snapping shift in strategy have varied. Was it a rash decision to punish Russian intransigence? Was it a short-term power play to coerce Moscow into negotiating? Or was there some longer-term method to the crown prince’s madness in the form of a strategy to radically transform oil markets, perhaps by driving higher-cost producers into insolvency?
Whatever the Saudi intent, the impact on U.S. interests is clear. Riyadh’s decision came precisely when the world economy was already verging on meltdown due to the accelerating coronavirus pandemic. The sudden crash in the price of the world’s most important commodity helped escalate the panic and volatility that sent financial markets plunging.
The price war, if sustained, is a near-certain death sentence for a majority of U.S. shale producers that were already struggling with high debt and the collapse in demand for jet fuel, gasoline, and ship bunkers amid worldwide lockdowns and travel bans. Whether laying waste to a strategic sector of the U.S. economy was a factor in Mohammed bin Salman’s decision, it will almost certainly be one of the results. Overnight, he put at risk tens of thousands of high-paying American jobs and struck a potentially mortal blow against a resurrected oil sector that has become a critical asset in Washington’s efforts to constrain oil-rich adversaries in such places as Iran and Venezuela. Once the shale industry is lost in an avalanche of defaults, bankruptcies, and abandoned wells, the risks are high that the costs of bringing the industry back in the foreseeable future could be prohibitive.
It’s important that the United States see the Saudi decision for the irresponsible and unfriendly act that it was. Trump’s initial reaction to the price plunge—focusing solely on the cost savings that U.S. consumers would get at the pumps—seemed particularly odd. In recent years, the price of gasoline has been a nonissue for most Americans—witness the booming sales of gas-guzzling trucks and SUVs. Moreover, in the context of the pandemic, most people are stuck at home and unable to take advantage of lower gas prices. Diffuse benefits on the consumption side are far outweighed by the economic, financial, and national security threats posed by the potential decimation of the shale oil industry.
Key U.S. officials understood that point before Trump. On March 16, 13 senators wrote a letter to Mohammed bin Salman decrying the Saudi move and calling on the kingdom to restabilize energy markets. On March 25, eight senators accused Saudi Arabia of “economic warfare,” threatening to withdraw U.S. security support and impose tariffs and sanctions. For good measure, two senators introduced legislation on March 27 to remove U.S. troops from the country.
U.S. Secretary of State Michael Pompeo called Mohammed bin Salman on March 24 to underscore “the need to maintain stability in global energy markets.” While more diplomatic than the senators, Pompeo’s basic message was the same: End the price war and work to stabilize prices.
Unfortunately, in the Trump era, the lesson that the Saudis have drawn is that if they are not hearing directly from the president or his senior aide and son-in-law, Jared Kushner, they can ignore the concerns expressed by other U.S. officials with impunity, whether the subject be the war in Yemen, the murder of Jamal Khashoggi, or, now, the oil price war.
Belatedly, Trump seems to have gained an appreciation for the stake the United States has in oil prices that work not just for American consumers, but for producers as well. In a March 30 interview, Trump said that “I never thought I’d be saying that maybe we have to have an oil [price] increase, because we do. … We don’t want to have an industry that’s wiped out.” In a subsequent phone call with Russian President Vladimir Putin, the two leaders “agreed on the importance of stability in global energy markets,” Reuters reported.
If the Saudi-Russian production cut announced by Trump is not forthcoming, then he needs to deliver the message forcefully to Mohammed bin Salman and his father, King Salman. In the past, Trump hasn’t hesitated to lambaste the Saudis when he believed they were damaging the U.S. economy. In 2018, he said that he had told King Salman that “you might not be there for two weeks” without U.S. protection.
Trump should apply similar screws to ensure the Saudis stick to any deal to back away from the price war. Any threat of rupture with the kingdom’s most important ally would be deeply problematic for Saudi security as well as Mohammed bin Salman’s personal standing within the royal family. He can’t afford to risk losing Trump’s favor. He fears Trump’s wrath. The president should exploit that advantage.
An added sweetener that’s been hinted at by U.S. officials is the possibility of getting American oil producers to cooperate with OPEC on production limits. While this kind of cooperation would be nearly unthinkable in ordinary times due to U.S. antitrust concerns, antipathy toward OPEC, and the lack of centralized authority over oil companies, these are anything but ordinary times. The coronavirus crisis has dramatically expanded the spectrum of solutions that countries (and imperiled industries) are prepared to consider to weather the disaster now bearing down upon them.
It may be ironic that the United States, after decades of criticizing the Saudis for keeping prices too high, is now attacking Riyadh for driving prices too low. But it’s worth recalling the fundamental bargain that rests at the core of the U.S.-Saudi relationship. In exchange for America’s underwriting its security, the kingdom pledged to provide access to its oil at reasonable prices. People may quibble over the meaning of “reasonable.” But in a world in which the U.S. military remains the one force standing between Saudi Arabia and a rapacious Iran, Washington is within its rights to inveigh against any Saudi oil strategy that undermines the foundations of U.S. economic power and national security—regardless of whether the Saudi strategy leads to prices that are too high or too low.
Whether the U.S. shale oil industry survives in its present form or not, what the current price war has already destroyed is any notion of U.S. energy independence. When a foreign country can push a critical segment of the economy to the brink of extinction with the flick of a switch, “independence” is not a word that applies.
Beyond any short-term fixes to the price war, the United States still needs a long-term strategy for achieving true energy security. Perhaps the most important step that could be taken is breaking oil’s near-monopoly in the transportation sector. More electric vehicles are one answer, as are those powered by ethanol made from natural gas. The latter would create a large new market for the U.S. energy industry, while reducing exposure to the damaging volatility of global oil markets that remain heavily influenced by foreign governments that rarely have U.S. interests at heart.
For now, however, all eyes are on Trump and Mohammed bin Salman. Trump must rescue U.S. shale oil from the Saudis—and make sure that any deal to cut back production and stabilize prices will truly stick.
John Hannah is a senior counselor at the Foundation for Defense of Democracies and former national security advisor to Vice President Dick Cheney.