Saudi Arabia’s October Surprise For Business

Today’s OPEC+ decision to cut oil production by two million barrels a day with additional unilateral cuts by the largest OPEC+ producer by far, Saudi Arabia, follows the Kissinger mantra that countries do not have friends, only interests. But in this case, Saudi Arabia is sabotaging their own interests. And those of businesses the world over.

Make no mistake: This cut—coming when it does, as the world’s corporate leaders struggle with already-record inflation—shows Saudi Arabia is no friend to the business community in the U.S.—or anywhere else. CEOs should pay attention here—and not forget.

It will also, to be clear, prove to be an unvarnished disaster for Saudi Arabia. Last weeks’ $80/barrel global crude oil price enhanced the Biden Administration’s domestic fight against inflation. It also fortified the inspiring global unity against Russia’s war machine with the inefficient Russian oil business barely above breakeven.

The Russian breakeven cost to extract oil is $46 a barrel while Saudi’s cost is merely $22/barrel. Plus, due to sanctions, the Russians can only sell to countries like China and India who demand a $35/barrel discount and require a month longer shipping time to reach Asia than their former EU markets.

However, it was great for the Saudis and most OPEC nations, ensuring them more than a 73 percent profit margin. There was no immediate need for the Saudis to push for even more, unless they intended to hurt the U.S. and help Russia.

Their mistake—which will fuel global inflation, increase U.S. gas prices and give windfall profits to help Russian President Vladimir Putin murder Ukrainian civilians—is being interpreted as an open hostile act in the U.S. It undermines what little trust remains in our historic “partnership”, and ultimately only strengthens Iran and enemies of Saudi Arabia. This is on top of existing calls to hold them accountable for the brutal murder of Jamal Khashoggi and their role in the horrific Yemen war and ongoing blockade.

The World Has Changed

The Saudis are overplaying their hand dramatically. As much as they may resist, energy markets have changed and we are rapidly approaching a buyer’s market, not a supplier’s market. For the first time in history, the U.S. is producing more oil than Saudi Arabia already by a healthy margin.

Contrary to beanball attacks against Biden’s energy policy from the right and to the displeasure of some environmentalists from the left, the U.S. is on pace for record oil drilling in ’22/’23 including offshore and federal lands while still staying on track on net zero goals, with the number of active oil rigs increasing 50% across all production fields here adding an additional 1 million bpd this year alone.

U.S. production will continue to increase many times more rapidly than Saudi production in the years ahead, especially since the Saudis are not operating at genuine maximum capacity despite their claims, with production levels now a whopping 33% lower than they were under former President Donald Trump – not even counting their newfound reluctance to release oil from their version of the strategic petroleum reserve.

The Saudis fear the G7 price cap “buyer’s cartel” and mistakenly see short-term shared fate with Russia—a massive mistake since the G7 price cap is not targeted towards Saudi Arabia at all. Russia is the only country which desperately needs production cuts because Russia is the least efficient producer with the highest breakeven costs (2x more than Saudi Arabia) and extremely cash-starved from Putin’s failing war in Ukraine and the implosion of the Russian economy.

By running into Putin’s blood-soaked embrace, Saudi Arabia loses not only politically, but economically too, as they will forfeit disproportionately more market share than any other country as the only country meeting its existing quotas. This will be exacerbated over time, since with higher prices and a history of “cheating quotas”, other producers will be incentivized to increase supply past their lowered quotas, capturing lost Saudi market share and reviving historical Saudi frustrations.

What to Do

Given the timing of the Saudi’s “October Surprise”, the U.S. should learn the lessons of the Yom Kippur War 40 years ago by responding in-kind. The U.S. exclusively underwrites Saudi security assistance to the tune of hundreds of billions of dollars every year, but what is the U.S. getting for this investment?

The Saudis need us much more than we need them – which they seem to have forgotten. It is long past time to rebalance this one-sided relationship – and the U.S. can reciprocate by halting the missile and weapons system sales Saudi so desperately needs, as advocated for by Senators including Republicans Mike Lee and Todd Young.

Contrary to Saudi-funded misinformation, while hundreds of thousands of Saudi jobs would be at stake, only a few hundred US jobs are actually at risk – less than the layoffs announced by each of Snap, Goldman Sachs, and Docusign in the last week alone.

And contrary to the myth that the Saudis would turn to other weapons suppliers—unless they wish to purchase repurposed Iranian drones from Russia or buy from China the same less-advanced weaponry as their Iranian foes—the Saudis have nowhere else to turn.

That is hardly the hand of a country dealing from a position of strength. Furthermore, Saudi intransigence is likely to resurrect proposed NOPEC legislation to crack down on the OPEC+ cartel’s anticompetitive price manipulation through international law.

By siding with Russia in hiking oil prices and sabotaging our economy, the Saudis have really outfoxed themselves this time—it was a time for choosing, and they picked the wrong side.

Photo: Russian President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman in 2018. (LUDOVIC MARIN/AFP via Getty Images)