By Nick Cunningham, a Washington DC-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1. Cross posted from OilPrice
Could the U.S. unleash a flood of oil from the strategic petroleum reserve that would drive down prices in order to punish Russia? While the idea has been kicked around over the last few weeks – most recently by George Soros – it has also been dismissed as not a serious option. Some say the impact of an oil sale, if it actually succeeded in lower prices, would be temporary. Saudi Arabia could cut back on production to keep oil prices at their current levels. Others decried the idea as contrary to the objective of the SPR, which has been setup to be used only in cases of emergency.
However, over at Quartz, Steve LeVine wrote an interesting article about the possibility of a coordinated response between the U.S. and Saudi Arabia that could have a much broader impact on oil markets. President Obama is, after all, meeting with the Saudi King on March 28. Ukraine is certainly going to come up in their discussions – his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security.
LeVine argues that it is possible that the U.S. could sustain a sale of 500,000 to 750,000 barrels of oil per day from the SPR. If the U.S. coordinated with the Saudis to ensure that they did not cut back production – indeed, they could even step up production from 9.7 million bpd – the greater supplies could slash prices almost immediately. Russia gets about 70% of its export revenue from oil and gas, so even a modest drop would be a significant blow. A former Ford and Carter administration official believes a U.S. SPR release could lower oil prices by $12 per barrel, potentially costing Russia $40 billion in lost revenue.
But by LeVine’s own account, there are few signs that such a move is in the works. Saudi officials, including Prince Turki bin al-Faisal, recently remarked about the global nature of today’s oil market, and the inefficacy of a single nation’s move to impact supply. Moreover, Saudi incentives aren’t exact in line with such a move. As one the world’s largest oil producers, Saudi Arabia would suffer from a drop in oil prices. And the fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America Merrill Lynch estimates the Saudis need a global oil price of $85 per barrel for its budget to breakeven. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from the $105-$110 range, where they have been for the last few months.
Not only that, but as LeVine notes, the Saudi King is convinced the U.S. is “unreliable,” and relations between the two countries hit a low point after Obama’s back and forth over air strikes on Syria last year. With Saudis increasingly frustrated with the U.S., why would they shoot themselves in the foot just to help out an unreliable partner? Now they could be interested in striking a blow against Iran, which lower oil prices would do. But, that doesn’t seem like enough of an upside.
Back in the U.S., President Obama could get an earful from oil producers if he reaches for the SPR spigot. Attempting to saturate the market with SPR oil could lower prices, but that would be pretty damaging to U.S. drillers. Their Republican allies will also oppose the move, at least they did when Obama used the SPR back in 2011 during the Libyan civil war. Republicans may have more difficulty justifying their opposition this time around, given that they have been the loudest about using American energy as a geopolitical weapon. But they will surely argue that exports are the better answer to Russia than an SPR release.
For now, Obama will probably hold the SPR card in his back pocket. Should Russia resist any further action in Ukraine, nothing will come of it. But, he is almost certainly mulling over the idea in the event that Russia takes broader action in Eastern Europe.
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Let me quote the latest figures I could quickly find about where Saudi export oil goes:
“Saudi Arabia exported an estimated 7.5 million barrels per day (bbl/d) of crude oil in 2012. Far East Asia received an estimated 54 percent of Saudi Arabia’s crude oil exports, as well as the majority of its refined petroleum product and natural gas liquids (NGL) exports.
Saudi Arabia exported an average of 1.4 million bbl/d of total petroleum liquids to the United States through the first 10 months of 2012 (up from 1.2 million bbl/d for calendar year 2011), accounting for 16 percent of total U.S. crude oil imports. Saudi Arabia ranked second after Canada during that time as a petroleum exporter to the United States. Other major Saudi customers in 2012 included Japan (1.1 million bbl/d), China (1.1 million bbl/d), South Korea (0.8 million bbl/d), and India (0.7 million bbl/d).”
I think it a bit silly to think that Saudi Arabia is going to lower their price to support US interests when our current purchase volume is less than 19% of their total exports and basically on par with China, who is supporting Russia, in case you haven’t been keeping score in the latest Ukraine global dust up. And are we really going to shoot ourselves in the foot by compromising the SPR for Ukraine posturing?
I am voting with the folks that say this is not a serious option.
ambrose evans-pritchard argues that china is not siding with russia on crimea and makes some convincing arguments. while some of what he says is common knowledge and maybe irrelevant, such as reading too much into china’s abstaining at the un security council vote on crimea, he brings up some historical contexts that are often ignored. we know china has a long memory when it comes to historical slights, so it wouldn’t surprise me too much if they were still seething at russia’s conquest of siberia. however, the maoist revolution was against the u.s. backed kmt and i doubt they’d have forgotten that either.
personally, i think it’s almost certain that they share moscow’s view of the events in kiev, though i am much less sure whether they support russia’s annexation of crimea. such brash and impatient moves are anathema to china’s approach to foreign policy, after all. however, i am sure the chinese are aware that their economy is a ponzi scheme and that it has a demographic time bomb on its hand and, once both explode, the u.s. is unlikely to be a friend.
here’s the ambrose evans-pritchard article: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10725643/Putins-Russia-caught-in-US-and-Chinese-double-pincer.html
Thanks for the article. What I see is an extraordinary diverse range of views on this subject. All I know is a very coplicated world balance of power is becoming more complicated all the time.
I have to think the encirclement of China by the US military forces them into bed with Russia and the two nations really have no choice but to stand together. The question remains: will they sacrifice Iran to buy time or will Iran be America’s “bridge too far” and the moment China/Russia conclude that there’s no more time to be bought so unleash the financial apocalypse?
Yet Ukraine really is a slap in the face to Russia. China surely must understand this challenge.
i’m inclined to accept this view as well. china must know that as long as america can make money from the partnership, they can keep prospering, but only on america’s turn. furthermore, they know that china’s economy won’t grow forever.
one thing i’ve picked up from this crisis is that most people had been writing off obama and kerry as hapless , impotent, in this crisis they had so skillfully engineered. following o’s speech in brussels the other day, i’m starting to believe we’ve been tricked and this foreign policy isn’t just some blundering interference ignorant of the consequences. obama is trying to use the standoff with russia to ween europe off russian gas and open up the continent for fracking by american firms or their licensees. to do this, they must first sign the transatlantic treaty which will now be pushed as a necessary tool to fight back against the russians. that will open the doors to fracking on a large scale.
. . . . much less sure whether they support russia’s annexation of crimea. such brash and impatient moves are anathema to china’s approach to foreign policy . . .
I doubt China buys into the US/Western propaganda of Putin as a “brash and impatient” out-of-touch dictator. By what standard was it “brash and impatient”?
China may well be more concerned with the US’s fomenting an ethnically-centered insurrection. China is very concerned about the ethnic groups within China (one of which has been involved in knife attacks with mass casualties).
AEP is usually pretty good but in this case he must have missed the opinion piece in Xinhua on Mar 3 that said the following:
“Based on the fact that Russia and Ukraine have deep cultural, historical and economic connections, it is time for Western powers to abandon their Cold War thinking, stop trying to exclude Russia from the political crisis they failed to mediate, and respect Russia’s unique role in mapping out the future of Ukraine.”
http://news.xinhuanet.com/english/indepth/2014-03/03/c_133154966.htm
From China’s perspective, that Xinhua pieces makes sense for them.
Assuming the Saudis would agree to this very silly idea they would want something in return. What they would probably want is a harder line on Iran and perhaps some bombing in Syria or allowing Turkey to invade Syria. That, in turn would be a further assault on Russian interests which would lead to what exactly?
Not a silly idea at all. In the past a big part of any successful US pressure against Russia has been orchestrating a lower oil price. The State Department remembers this very well, and so they’ll at least think about trying it again. The big question is whether it’s physically possible in the political and geological conditions of 2014 – i.e can the oil market be pushed into a condition of oversupply without the full participation of Iran and with civil war in Iraq? Maybe, but I doubt it.
Obama has some freedom of action vis-à-vis the Iranians and the Saudis, and may have set up a situation where they find themselves bidding against each other for influence over US policy via incremental barrels of oil production. The Saudis can offer a couple million extra barrels a day in exchange for a hard US line against Iran as Banger points out; while the Iranians can offer even greater increments in exchange for a reasonable settlement on the nuclear issues. Can either of them deliver, given today’s realities wrt peak oil? It’s hard to say, because in the Middle East everybody lies about producible oil reserves.
We’ll learn a lot watching this play out.
And BTW, if they are serious about trying for an oversupplied oil market, that implies a greater likelihood that they will have to approve Keystone XL.
Only problem is, it is doubtful at this juncture if Saudi Arabia has much in the way of surge capacity vis-à-vis light sweet crude. And America’s strategic reserve is finite and easily gamed by the markets. They know what cards Washington has and how long it would take to exhaust them before Uncle Sam has to go back into the market and replace its reserves. Also a dicey thing to do if you are a nation hooked on military interventionism. Dump the strategic reserve and the military will be in a hand-to-mouth existence.
Naturally all this will come about as the warm weather arrives. No energy savings on heating costs for average people in the west. I think we can count on the insiders getting out of oil while the price is still high then getting back in by November at the bottom price to enjoy the ride back up. Just in time for another cold winter.
Ukraine continues to be the gift that keeps giving. Daily revelations as to how our world really is – endless hypocrisy. A shame most won’t see such revelations at any cost.
Here’s a bit of whimsy. Perhaps the global oligarchs are pivoting in unison to reorient the oil market thusly: Russian oil goes to Asia, ME oil goes to Europe, North/South American oil goes wherever needed consistent with desired profit margins. Clearly the one thing not at issue is the primacy of oil. No one (in power) is suggesting that a Green Marshall Plan is the answer to both climate change and global conflict. Clearly there are cooperative, non-conflictual approaches to our resource-based dilemmas – but the threat of armed confrontation (real or kabuki) further empowers the existing MIC and is infinitely more profitable. Global capitalism as currently constituted requires or proliferates instability. As Yves likes to say – that’s a feature not a bug. At the same time, a certain amount of oblique transnational collaboration is necessary for the New World Order to survive and thrive. Wake me when the 1% begin to suffer long-term losses..
Yes, who has the whip hand here: the National Security State or the Corporations. Of course they overlap, but the core constituencies have very different needs in the short, medium, and long run. The Globalization paradigm of neoliberalism was unleashed during and after the collapse of the Cold War, it’s primary agents being the Clinton Administration and its follow-ons. It had antecedents, but could only go balls-to-the-wall once the Soviet Union was neutered and then collapsed. The MIC, Deep State, or whatever you want to call it, went along because it offered an avenue to extend American power and control. But if Russia and China will no longer play ball as subcontractors to the great American corporate takeover of the globe, then we are in for a fight between those that want to cut them in with a better deal, and those that want to isolate them and restart the Cold War. All this within a backdrop of global climate change, massive international leveraging, and an America riven with internal divisions and teetering on political paralysis. Not a pretty picture.
the Saudi King is convinced the U.S. is “unreliable,”
Saudi Arabia, the Gulf states, and Israel are pushing for action against Iran and pretending that the Obama Administration is “unreliable” or tone deaf. However, the falseness of this posture was revealed when the US came very, very close to bombing Syria – and toppling Assad (which still appears to be a goal).
Um, isn’t this why God invented futures markets?
Point of information: are there floods of oil in the U.S. strategic reserves? Oil that flooded out now might not be available to fight battles with later if the gloves were to come off.