In February, 1945, the ruler of an impoverished country, King Abdul Aziz ibn Saud, met with the leader of the most powerful nation in the world, President Roosevelt.
The meeting took place aboard the cruiser USS Quincy in the Great Bitter Lake, a part of the Suez Canal.
During the meeting, the King mentioned that his legs had grown feeble with age, and the President said, “I have two of these chairs, which are also twins. Would you accept one as a personal gift from me?”
The king said, “Gratefully. I shall use it daily and always recall affectionately the giver, my great and good friend.”
The meeting established a personal relationship of trust and respect between two men, and a relationship between two countries that has lasted for nearly three quarters of a century.
The relationship survived despite both countries having polar opposite views on Israel.
It began to fray when it became known that some of the highjackers who committed the 9-11 attacks on the United States were from Saudi Arabia, and that a Saudi, Osama bin Laden, had instigated the attack.
In the complex relationships of the Mideast, where Sunnis are aligned against Shiites, and where a Sunni faction has established a Caliphate, and a conservative Wahhabi Sect has been aligned with the Saudi ruling family for centuries, and where Saudi Arabia’s oil rich Eastern Province is mostly Shia, it’s difficult to make sense of the various factions.
Over the past few years, the Saudis have been threatened at various times from four sides: From the East by Iran, from the West by a Morsi government in Egypt, from the South by insurgents in Yemen and from the North by ISIS.
Economically, the Saudi’s perceived an economic threat from the United States with its development of shale oil.
For reasons only the Saudis can understand, they decided to reverse their support of the price of oil, and instead undertook a strategy of maintaining market share which inevitably led to lower oil prices.
It was an attack on the economic interests of the United States, but also, possibly, a strategy to deny Iran the ability to fully benefit from its oil exports at higher prices. It was believed, correctly, that embargoes would be lifted when the nuclear deal with Iran was finalized and Iran would increase its oil exports.
Surely, the Saudis assumed other OPEC countries would conform to its strategy and not engage in price cutting. This could have been a rational assumption if the oil surplus had been quickly eliminated and if the shale oil industry in the United States had quickly collapsed.
Now a year has passed, and the situation appears entirely different.
Demand for oil has grown only tepidly.
While hurt, the shale oil industry in the United States has not collapsed. In fact, it has gotten better at producing oil. And, it has demonstrated it can quickly increase output when prices rise, placing a cap on the price of oil for the next few years until worldwide demand increases more robustly.
With oil still in surplus, other OPEC nations have begun undercutting the Saudis. A price war is emerging, and it’s likely to expand as Iran increases its output of oil.
The Saudis believed they could stabilize the market and quickly eliminate the over supply of oil by allowing the price of oil to fall, thereby putting shale oil and other marginal producers out of business.
But it hasn’t happened that way.
Saudi Arabia now faces the possibility of deteriorating prices, with OPEC nations undercutting each other. Meanwhile the shale oil industry lurks in the background, ready to pounce when prices rise.
The Saudis may have committed the worst business blunder in recent years, and opened Pandora’s box of oversupply and low prices.
Meanwhile the United States will benefit long term with a shale oil industry that continues to improve its ability to produce oil.
Unless OPEC can reduce oil output to align supply with current demand, it’s doubtful the price of oil will go much above $55 per barrel until worldwide demand increases and the oversupply of oil is reduced. While some areas in the U.S. will support new drilling at prices below $55, new shale oil development becomes profitable in an increasingly large number of areas above that price.
Saudi Arabia has been pumping at around 10.5 million barrels per day during the summer to accommodate its air-conditioning load, and should cut back by around 0.3 to 0.5 million barrels per day this fall.
A significantly larger cutback could indicate a change in strategy.
. . .
Comment:
The Kingdom, Arabia and the House of Saud is the source of historical information. Pages 268 – 275 relate specifically to the meeting between ibn Saud and President Roosevelt.
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