Spearhead Analysis – 14.12.2016
By Hira A. Shafi
Research Analyst, Spearhead Research
There is no doubt that Trump is ascending to the Presidency in difficult times. The US has tied itself up in an intricate interconnected web of globalism which Trump aspires to undo as he largely blames it for increasing class disparity and loss of core American ideals.
But, there is often an incoherency in what he says, what he means and what he actually intends to do to resolve issues. Clearly, Trump desires to revive the American economy, help average Americans and be at peace with all nations. But, pushing the Shale Oil agenda, slandering the OPEC cartel especially Saudi Arabia, cornering Iran– does not add up to actualizing his vision.
Speaking to RT, following the Ukraine crisis Putin gave the US a good advice which was: to cut down unrestrained use of sanctions and avoid aggressive foreign policy as it increases conflicts.
These reasons also play a pivotal role in prompting countries to seek alternative currency and trade arrangements.
Post Ukraine crises; Gazprom announced its switch to Rubles, Euros, and Yuan for some of its contracts. The BRICS and SCO nations are also drafting various bilateral trade agreements in their own currencies.
Significance of OPEC:
The petro trade has primarily been carried out in USD for several years, because of OPEC’s decision to do so.
Growing energy requirements simultaneously increased the demand for the USD globally, allowing the USD to become the world’s largest global reserve currency, while preventing them from getting hit back by inflation because of continuous energy demands linked to the dollar. This also makes the US financial sanctions more hurtful because it also affects the energy sector of countries.
A strong push for Shale might put the US at odds with OPEC causing them to entirely lose grip of the petro trade— this might hurt the US economically.
Further, several countries including Saudi Arabia invested in US Treasury securities over the years which helped the US finance itself. But, countries are not unanimously demanding their money back, this should be a sign of relief for US; no one wants to crush the US economy.
It would negatively impact other economies too, because US serves as a big export market and caters to the world in several ways through its diversified industries and services.
However, what people would want is for US to (quote trump) “stop being the policeman of the world” and perhaps play fair. Otherwise, it might isolate itself.
The Deepening rift:
Data shows acute fluctuations in the OPEC oil prices in contrast to the demand, 2003 onwards, suggesting that other factors may have played a role in these price fluctuations.
A country which didn’t cross the threshold of 30usd/barrel for several years, pushed its price at 154$ per barrel in 2008.
While everybody was enjoying their temporary perks; the business savvy Prince Al Waleed in 2013 wrote an open letter addressing the Saudi Oil minister and other key members of the royal family warning them of the adverse effects these price hikes will have on the Saudi economy in the long run, because some major US energy giants had begun extensive shale exploration projects. The oil price drops that followed upset the US companies and the government officials were also displeased.
This is what makes OPEC-US rifts worse; they blur the lines between relations with private corporations and official governments.
The Former Saudi Minister of Oil Zaki Yamani and the Shah of Iran faced criticism by various sources over the advice he offered to the OPEC members post Yom Kippur conflict: to not cut oil productions and increase prices, because it would lead to tense state relations and increase regional instability and largely benefit the interests of energy giants, some of which according to him were seeking large funds at the time.
He called for the OPEC members to start differentiating between private organizations and states. He also advised them to diversify beyond the core industries. This advice was once again repeated by him in an interview with Guardian, post 9/11.
ExxonMobil, Chevron, Shell oil, ConocoPhillips have reported a decrease in profitability in the wake of oil price drops, prices saw a massive dip to 20$/barrel in January, and their calls for increase in oil prices was largely undermined by the OPEC. However, the prices have surged to approximately >50$/per barrel.
But these companies did not go broke, they still made profits.. A recently published article in the Washington times states that ExxonMobil is richer than most countries in the world. . … So, Is cheap oil bad for the average American and other businesses?
A chain of Political and business pressures were used by the two countries to deter each other, since the letter was issued.
The young prince Mohammad bin Salman, curator of the Saudi vision 2030, started making active efforts to not only diversify the Saudi economy and seek alternative partnerships.
He has signed various contracts with China and decided to do the inconceivable (according to Saudi standards); put up 5% of Aramco’s stakes for sale to manage economic crises which befell the kingdom in 2015 due to the Yemen conflict. But, raising prices was still not an option.
Certain reports surfaced claiming that the Saudi’s were promulgating some US agenda by trying to crash the Russian economy by dropping oil prices. But, instead the Saudi officials responded by asking Russia to join OPEC and work collectively on designing an oil strategy; but Putin doesn’t seem to be driven by spurts of emotion and has decided to put the decision on hold.
The US after 15 years decided to drag the kingdom into its courts over claims of Saudi connections to 9/11, this was obviously not taken well by the Saudi Government and they voiced their urgency to sell 750 billion USD worth of US treasury bonds, to recover the security costs caused by regional conflicts.
In conclusion, The Saudis have made it very clear that they do not want US shale oil to undermine their role in the long run and opposite intentions have been made very clear by Trump.
Is the OPEC asking for too much?
The benefits to US from this alliance are immense—because the Saudis and the majority of GCC countries are reliant on foreign companies to run their entire system. And despite the recent welcomes to Singaporean and Chinese companies, most Gulf countries; especially Saudis, have always preferred and trusted US companies in almost every sector.
And under this often misconstrued banner of nationalization, the kingdom serves as a major hub for US businesses to thrive. Apart from the attractive partnerships offered to major US oil giants in oil & gas exploration, mining and other mid and downstream industries; Innumerable mid-sized US companies also have a dominant presence in the highly lucrative offshoots of the Saudi energy sector and mining sector( Starting from the oil wells, down to computing systems and everything in between).
The other US products and services are also largely welcomed, may it be in the clothing, food or automobile industry. And this is good business—- because it emanated from peace, trust and consent .Not threats.
Is it worth it to sacrifice a mutually beneficial relation over a resource which is only going to add fuel to fire? The US holds trillions of barrels in Shale Oil reserves– naturally the oil companies will eventually seek to export the oil and gas. OPEC fears that due to superiority of the US companies in logistics, transport, machinery, equipment they could easily undermine Middle East oil.
But, the location, accessibility, quality etc, makes the Middle Eastern oil more desirable and allows them to make decent profits at even 40$ per barrel. Whereas, the Shale cost of production is much higher. Thus, the demand for Middle Eastern oil will continue to exist. This might create further conflicts. Setting 60% of the global oil reserves on fire or annihilating the entire Middle Eastern population wouldn’t work because who is going to buy all of the new oil, goods and services? So why waste efforts bickering and provoking each other?
Quoting IEA “If OPEC doesn’t stop overproduction we will drown in oil”. This actually goes for all energy giants.
Despite, the upcoming administration’s harsh rhetoric towards Iran, Royal Shell has already signed various contracts with the Iranian government, so big businesses will always follow big money, no matter what the situation is. But, this push for Shale might endanger the other countless US businesses that are benefitting from the Middle East. This might also push wealth in the hands of few, undermine general welfare and increase security risks.
Data from the recent world Fact Book and World Energy Council report suggests that there is an adequate spread of various natural resources around the world, may it be coal, oil, natural gas or uranium. Environmental concerns prompted a leap towards renewable energy which is also catering to the world’s energy consumption. Countries such as Germany and Denmark have set timelines for nearly eliminating the use of non-renewable energy. So, despite population growth forecasts there is an abundance of resources for humanity to utilize properly if fair and efficient allocation is carried out.
Issues arise when people fear domination of such widespread resources–it shapes an unfeasible future, because people will retaliate.
Honest dialogue needs to be carried out in working out energy strategies. Hopefully, Rex Tillerson (Exxon Mobil CEO) would help in formulating a more peaceful approach towards this issue once he becomes Secretary of State.
But, again the Trump administration should keep in mind that they are not running a business. As, enticing as economic uplifts sound to people, various sentiments are at play which if offended, could lead to a change of heart.
Iran has put down its arms and Saudis are putting Aramco for sale and opening up the Kingdom to foreign investors; this indicates that the new leadership has progressive views and would most likely be willing to put aside religious and cultural differences for the benefit of the region. If the US at this point, genuinely accelerates the peace process and regional integration, it will once again be trusted and welcomed by these countries and would then be in a position to work out great, mutually beneficial deals for the leaders, business owners and the people. This would be a challenge for the Trump administration and not just in the Middle East—in South Asia US policy by tilting towards India and Afghanistan and ignoring the atrocities in Kashmir is creating a dangerous imbalance.