The Saudi Snub: How Joe Biden's Energy Gamble Is Falling Apart

Geopolitical analysis is all about connecting seemingly-unrelated dots, so that no one event is inadvertently studied in isolation. In today’s global village, where supply chains and markets are so umbilically interlinked, every flutter is a butterfly effect to some extent or the other.

So, the big story of the week before last of American President Joe Biden’s meeting with the Saudi Arabian crown prince, Mohammed bin Salman, in Jeddah is better understood when read in conjunction with other events in other parts of the world.

The optics of this long-overdue meeting were off from the start. Biden’s main aim was an urgent, immediate commitment of higher oil exports from Saudi Arabia, to tide over the energy mess the world was reeling under, thanks to disruptions in trade due to the Ukraine conflict.

But the atmosphere, already glacial for various reasons, was made icier by awkward questions from the press to both leaders. Biden was asked if he still thought that Saudi Arabia was a pariah state; and the crown prince was needled about his government’s culpability in the 2018 murder of journalist Adnan Khashoggi.

And in the end, Biden failed to wrest any promise of increased oil production from his host. Instead, the Saudis put out a cleverly-worded statement declaring an intent to raise production capacity to 13 million barrels per day in a few years. In their haste, many misread ‘capacity’ for ‘production’. That led to a string of red faces, but no one missed the snub Biden received; he would have to return home empty-handed, with the energy mess still swirling furiously around his world.

A few days later, the leaders of Turkey, Russia and Iran met in Tehran. The optics of that summit was far worse from a NATO standpoint: Turkey, a major NATO member, was meeting Russia, NATO’s declared primary adversary in Iran, America’s eternal bugbear. It was a crucial meeting. A lot was discussed, but the main dot germane to this piece was an agreement between Russia and Iran, by which Russia would invest $40 billion to develop a few giant oil and gas fields in Iran, and an LNG terminal.

This was breaking news, if ever: the Iranians intend to not just ramp up production of oil and gas, but formally enter the LNG export market in a huge way as well. America now has one more major competitor for its own hydrocarbon sales to Asia and Europe, and there is no way they will be able to best the Iranians in case of a price war. This is since the Iranian cost of hydrocarbon production, which is mainly from conventional reservoirs, is far lower than the Americans’, which is now mainly from expensive shale plays.

Next, these dots should be connected to a few others from June 2022:

First, Biden’s frustrated explosion at American oil companies, who had failed to meet his expectation of a surge in domestic drilling activity and refining capacity. His lament, that “Exxon has more money than God… but they’re not drilling”, stemmed from a deep fear that he might not be able to replace Russia with America as Europe’s main energy supplier. The American oil companies retorted strongly, and blamed Biden for his energy policy flip-flops which prevented producers and refiners from shifting into top gear. This was unprecedented, since American oil, pharma and arms companies rarely get into public slanging matches with their government.

Second, readers may recollect Indian Foreign Minister Dr S Jaishankar’s comments at a security conference in Bratislava. He asked that if there was indeed such a grave shortage of crude oil in the global market, what was preventing buyers from sourcing their needs from Iran? It was a cheeky swipe at American sanctimony, and a reminder that there is no real shortage of oil or gas in the world today — just artificial constraints imposed unilaterally by the Americans, in their interests.

Third, was the successful trial run of goods along a new trade route called the INSTC – the International North South Transportation Corridor, which runs over land and sea from Russia, through Iran, to India (see here for its strategic implications).

Fourth, is the economic mess in China, specifically a housing bubble which is set to burst. According to Swarajya’s Tushar Gupta, the Chinese economy probably won’t collapse outright, but it will certainly further dampen both global growth and demand.

And, fifth, is a recent, intriguing pattern observed in global oil prices. Historically, the international oil price, benchmarked by ‘Brent’, had always traded a few cents below the domestic American price, called the ‘WTI’. But since the twenty-first century, when shale oil and gas took off exponentially in America, the gap reversed, with Brent trailing WTI by a few dollars.

But, as a chart below shows, the gap between Brent and WTI exhibits an occasional tendency to widen (note how the green difference curve goes up), as a precursor to a drop in oil prices.

This phenomenon of a widening gap between the two prices has now manifested itself twice since the Ukraine conflict began. This episode is the first in some years, and can be noted on a zoomed chart of the period 2020 to 2022 below. The two most recent such events, of March-April and June-July 2022, are marked by black arrows.

So, putting all of the above together, what do we get?

First, Russia continues to set the global oil price, and Biden’s efforts to reclaim that vital power aren’t working.

Second, Iran’s rehabilitation on the world stage, and its resurgence as a global swing producer of oil and gas, appears inevitable. The only way this can be prevented is if the Americans indulge themselves with yet another conflict.

Third, a surge in American oil and gas production, already delayed inordinately, may be delayed further by a combination of factors. These include Biden’s policy myopia, Russia’s efforts to establish new trade dynamics in the hydrocarbon world, and China’s domestic issues.

Fourth, as a result, hydrocarbon demand, and demand growth, will both remain torpid.

Fifth, while some uncertainty over pricing and supply of hydrocarbons will continue, it appears that the global oil price could come down soon. It already has, in a sense, as Russia is now selling increasingly larger volumes of crude oil to India at significantly discounted rates.

And, sixth, Biden’s great gamble of using the Ukraine conflict to isolate Russia, end European dependency on Russian energy, and soon make America Europe’s primary energy supplier, looks set to fail. He may be from Delaware, but even he should know that a carrot-and-stick approach doesn’t work with Texan oilmen.