OBAMA IN RIYADH: The stories behind and aside the scene

US President Barack Obama paid a four-hour visit to Saudi Arabia on January 27. A huge delegation accompanied him, made up by 30 members, including officials and lawmakers, as well as senior officials from previous presidential administrations (former Secretaries of State James Baker and Condoleezza Rice) following the death of King Abdullah. The visit included a meeting with the new Saudi King Salman bin Abdulaziz. Although the agenda included talks on the oil market, information in this regard is scarce, almost null. The media focused on political issues, approach on Syria, bilateral relations, Middle East security, Iran, terrorism, even human rights. Official releases speak about the importance of a U.S.-Saudi alliance that extends beyond oil interests to regional security.

Western media was mostly preoccupied by the scandal following the first lady Michelle Obama’s gesture to shake hands with the Saudi king, as Islamic law generally forbids men from touching women to whom they are not related. Michelle Obama also did not cover her head, eschewing strict religious and cultural customs in Saudi Arabia.

Nevertheless, the strategic alliance between the US and Saudi Arabia remains solid. According to sources, the two leaders touched briefly the oil-market issues, the conclusion being that the US is not expecting changes in the Saudi position of maintaining high production, although the oil price has fallen by no less than 58 percent in the second half of 2014. “There was no discussion about oil prices,” an official said.

However, things happen aside the political scene. During the past weeks Saudi Arabia has secretly increased its oil production to 9.8 million barrels per day, the highest level of output since last October. Sources say this is part of the attempt to regain the market share in the oil price war with the US shale drillers. Khalid Al-Falih, chief executive of Saudi Aramco state company, said the output is higher by 300,000 barrels than the output measured by OPEC and time is needed to take the oil surplus off the international market. Analysts say the Aramco chief’s statements might mean the Saudis intend to put pressure on rivals outside OPEC. Meanwhile, OPEC officials remain optimistic, betting the oil price will be back to USD 130-140 per barrel, but no timeframe is considered. On international scale, the fall in oil prices hit hard the industry in the field. For example, BP announced it will freeze salaries in 2015 for 80,000 employees, other companies operated layoffs.

Meanwhile, Saudi Arabia is focused on two issues: not losing its worldwide market share and creating supply declined for non-OPEC countries. If some would say the first target is the US, well, this may be wrong. Russia is the first target. It may be the long discussed secret understanding with Washington to keep oil prices low in order to enhance the effects of western sanctions on Moscow. For certain is yet another target: making explorations in Siberia unattractive for companies. Availability of supply is increasing much more quickly than demand, so why not hit the new oil fields? Or even the older ones and countries such as Iran, Nigeria or Venezuela, dependent on oil exports.

As Russia is not feeling well at all, the Saudis, Kuwait and the United Arab Emirates make the rules on the world market for now.

Other sources maintain the US are the ultimate target for the Saudis. The US have reached an output of nine million barrels per day, one million short to reach the same level as Saudi Arabia. Lower prices might delay projects for shale drillers. Nevertheless, the Americans show optimism, saying they hold almost all best cards in this equation. The US economy is improving and the USD is appreciating by the day. However, no one knows how long this positive trend will hold. Analysts in Washington believe the Saudis are playing a losing game. But the Saudis may think the same way about the US.

Saudi Arabia is not going to perish by losing percentage points of the world oil market after all. Nothing significant will happen to the US if their tactics fail. The losers are somewhere else. This brings us back to the first assumption. Those tempted to look only at the economic side should not forget that the US-Saudi relations are strategic for decades. Saudi Arabia is the US’s main ally in the region and this position will overcome the economic issues. As CNN informs, the US-Saudi marriage of convenience was first initiated on February 14, 1945, on a US warship as it cruised in the Suez Canal. It was on the deck of the USS Quincy where President Franklin Delano Roosevelt first met with Saudi King Abdul Aziz to discuss areas of common interest. In the seven decades since that meeting, the relationship has largely worked well for both countries.

Bearing this in mind, there can only be one big loser on the world oil market, at least in the near future. That one is the Russian Federation.

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February 2015

June 2017