It was the fist bump seen ‘round the world.
White House officials may have hoped that, by not shaking hands with Saudi Crown Prince Mohammed bin Salman on a trip to Jeddah in July, Joe Biden would be seen as signalling that all was not well between his country and the Middle East kingdom he had once called a pariah.
Instead, by opting for the informal gesture of bumping fists with MBS, the U.S. President gave the world the rather creepy impression that the two men were best buds. And that all had been forgiven after Mr. Biden’s early 2021 release of a U.S. intelligence report that said the Crown Prince had approved the murder of journalist Jamal Khashoggi in 2018.
It was hard not to conclude that Mr. Biden had decided to swallow his pride, if not his principles, as he moved to persuade the de facto Saudi leader to increase oil production. With gas prices surging above US$5 a gallon after Russia’s invasion of Ukraine, Mr. Biden was desperate to see relief at the pumps before U.S. voters went to the polls in November’s midterm elections.
Gas prices did come down after Mr. Biden’s Middle East visit, falling below US$4 in September, a development that White House chief of staff Ron Klain took delight in endlessly pointing out on Twitter. Mr. Biden’s release of millions of barrels of oil from the U.S. Strategic Petroleum Reserve may have had some impact. But COVID-19-related lockdowns in China and an economic slowdown in Europe, amid fears of a global downturn, weighed much more heavily on oil prices than SPR releases.
It was not until this week, however, that Saudi Arabia replied in full to Mr. Biden’s July request. And its answer was a full-throated and (for Mr. Biden) humiliating “no.” At a meeting in Vienna, members of the Organisation of Petroleum Exporting Countries and Russia, the energy cartel known as OPEC+, announced plans to curtail production by two million barrels a day.
Saudi Arabian Energy Minister Abdulaziz bin Salman, the older half-brother of MBS, denied that OPEC was “weaponizing” oil prices, even though rising crude prices stemming from output cuts will likely enable Russian President Vladimir Putin to pocket billions of dollars in additional oil revenue to fund his military assault on Ukraine.
“Show me where is the act of belligerence,” Prince Abdulaziz said, arguing that higher oil prices are now needed to encourage investment in new exploration and production, without which the world could face an oil-supply crunch in coming years as existing wells are depleted. And a supply crunch would send prices skyrocketing to levels that would threaten global stability.
The problem is that, in the face of pressure from pension funds and other institutional investors, shareholder-owned oil companies have reduced investments in new fossil fuel production in Western countries in recent years. That means future production increases are more likely to be concentrated in authoritarian states with poor records on the environment and human rights.
Forecasts predicated on declining oil demand as the world moves to reduce carbon dioxide emissions may turn out to be wishful thinking. Surging electricity rates in Britain, for instance, have slashed the operating-cost advantage of electric cars as the cost of charging batteries soars. That is bound to slow demand for EVs.
The Paris-based International Energy Agency last year said that the world needed to halt new investments in fossil fuel projects to reach net-zero emissions by 2050. Saudi Arabia, whose state-owned oil giant plans to increase its production capacity to 13 million barrels a day from 12 million by 2027, did not get the memo. And it stands to be the biggest beneficiary of campaigns to shame multinational oil companies and banks into exiting Canada’s oil sands and the U.S. shale oil sector.
Climate activists and ESG (environmental, social, governance) enthusiasts insist any new fossil fuel projects in the West are doomed to become stranded assets as global demand dries up in the coming decades. But less production in the West only further strengthens OPEC, leaving consumers in democratic countries at the mercy of dictatorships abroad.
Under the IEA’s net-zero roadmap, which is based on a plummeting demand for oil to 24 million barrels a day from about 100 million now, OPEC’s share of global oil supply would increase to 52 per cent by mid-century from around 37 per cent. That, the IEA conceded, would be “a level higher than at any point in the history of oil markets.”
But what if oil demand does not fall by nearly as much as that? Given the history of Western countries failing to meet even their least ambitious climate targets in the past, there is plenty of reason to believe that the world will need more oil in 2050 than the optimists are telling us.
And without new production in the West, that could make OPEC and Russia more powerful than they are now.