Saudi Arabia New Output Cuts Threat Is Another Blow To Washington

Yves here. MbS is not being very nice to Biden! No more Saudi supply at US beck and call!

Flip intro aside, this post contains historical detail about Anglo/America oil colonialism which may be new to many readers. But it’s a bit much to depict Kissinger as having originated balance of power politics. Kissinger wrote his thesis on Metternich, who is depicted as a modern-era practitioner, as was Metternich’s contemporary Talleyrand. And they were hardly the first to attempt to pit tribes, and later kingdoms, against each other.

The mention of Kissinger also weirdly skips over the fact that prior to his ascension to power, the US has played the role of neutral-seeming power broker in the Middle East. The US has sold arms to Israel in the 1960s, but did not provide grant military assistance until after the Yom Kippur War.

Finally, this piece includes a simple-mined “Anglo/American oil pirates good, Russia meddling bad” that I trust you can read past.

By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. He has written extensively on oil and gas, Forex, equities, bonds, economics and geopolitics for many leading publications, and has worked as a geopolitical risk consultant for a number of major hedge funds in London, Moscow, and Dubai. Originally published at OilPrice

  • Saudi Arabia’s Energy Minister said that OPEC+ may consider a new round of output cuts.
  • U.S. influence in the Middle East is losing influence in the Middle East at the expense of Russia and China.
  • For Saudi Arabia, cutting all but the most essential links to the U.S. will also allow it to keep oil prices high.

Saudi Arabia’s threat last week to lead the Organization of the Petroleum Exporting Countries (OPEC) into a concerted cutting of its collective crude oil production – which would lead to even higher prices over a longer period – marks the end of the U.S.’s and the West’s Middle East dream.

This dream, as analysed in my new book on the global oil markets, began in earnest on 26 May 1908 when an oil drilling team led by British geologist, George Reynolds, struck oil at Well No. 1 at the Masjid Sulaiman field in Persia (partly now modern-day Iran). The 28 May 1901 concession for Reynolds’ employer – William Knox D’Arcy – to explore, drill, produce, and export petroleum in Iran (excluding five northern provinces close to Russia) for a period of 60 years, included the provision that Persia was to be given £20,000 in cash, £20,000 in shares from the company that operated the concession, and 16 percent of the profits made by the first or any other company formed by this concessionaire.

Shortly after the Masjid Sulaiman discovery, the Anglo-Persian Oil Company was founded, and in 1914, a 51 percent stake in the company was bought by the UK government, and in 1954 it changed its name to the British Petroleum Company.

At around the same time, Mohammad Mosaddegh, the highly popular prime minister of Iran, nationalised the UK company’s Iranian infrastructure assets, and renamed the new entity the National Iranian Oil Company (NIOC). Shortly after this, a military coup organised jointly between the UK’s Secret Intelligence Service (SIS) and the U.S.’s Central Intelligence Agency (CIA) codenamed, respectively, ‘Operation Boot’ and ‘Operation Ajax’, removed Mossadegh from power, which enabled Shah Mohammad Reza Pahlavi to increase his hold over the country, backed particularly by the U.S. and the UK.

A similar tale unravelled in Saudi Arabia, the concession deal for which made Iran’s pre-1951 oil profit share of 16 percent look positively generous.  To secure the exclusive rights to explore, drill, produce, and export petroleum across the entirety of Saudi Arabia, the U.S.’s Standard Oil made a single payment of US$275,000 in April 1933 (equivalent to just over US$6 million now) to the Kingdom.

For Middle Eastern countries, these facts – to this day – are still well known and inform their view on dealing with the West, which has long been regarded by them as being an occupier of the region simply to exploit its oil and gas resources for as little outlay as possible.

The first few signs of widespread and concerted action by Middle East states to counter what they regarded as the West’s stranglehold over their natural resources came with the formation of the United Arab Republic union between Egypt and Syria from 1958 to 1961, the formation of OPEC in 1960, the series of conflicts with neighbouring Israel over the period, and then the 1973/74 Oil Embargo.

During this embargo, effectively the first ‘Oil Price War’, as also analysed in depth in my new book on the global oil markets, OPEC members plus Egypt, Syria and Tunisia began to block oil exports to the U.S., the UK, Japan, Canada and the Netherlands. This was in response to the U.S. supplying arms to Israel in the Yom Kippur War that it was fighting against a coalition of Arab states led by Egypt and Syria. The spiking effect in oil prices was exacerbated by incremental cuts to oil production by OPEC members over the period and by the end of the embargo in March 1974 the price of oil had risen from around US$3 per barrel (pb) to nearly US$11 pb and then it trended higher again.

Saudi Arabia’s then-Minister of Oil and Mineral Reserves, Sheikh Ahmed Zaki Yamani – widely credited with formulating the Embargo strategy – highlighted that it marked: “A fundamental shift in the world balance of power between the developing nations that produced oil and the developed industrial nations that consumed it.”

This history and these ideas are precisely where the global oil and gas market is now, and exactly the reason why Saudi Arabia’s current Energy Minister, Prince Abdulaziz bin Salman, said what he did about OPEC being ready to cut crude oil production and, by extension, see oil prices rise higher for longer.

For decades, this strain of petro-nationalism had been largely muted by the agreement struck back on 14 February 1945 at a meeting between the then-U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz. The deal that they agreed – which had been the basis for all the U.S.’s Middle East policy up until very recently – was this: the U.S. would receive all the oil supplies it needed for as long as Saudi had oil in place, in return for which the U.S. would guarantee the security both of the ruling House of Saud and, by extension, of Saudi Arabia.

From the U.S. side, this deal was significantly undermined by the launch of the 2014-2016 Oil Price War by the Saudis, which was intended to destroy or disable the then-nascent U.S. shale oil sector. From the Saudi side, the key initial turning point came with the U.S.-sponsored ‘nuclear deal’ for its historical nemesis and great regional power rival, Iran. Behind-the-scenes moves towards this deal began at around the same time as the onset of the 2014-2016 Oil Price War, with the deal agreed in 2015 and implemented in 2016.

It is also this history and these ideas that are being used by Russia and China to stoke further discontent within the region. Russia’s foreign policy broadly is to create chaos and then to project Russian solutions, and therefore power, into that chaos, and China’s broad foreign policy under its multi-generational power-grab ‘One Belt, One Road’ program is to project money, and therefore power, into that same chaos.

Ironically, as also analysed in depth in my new book on the global oil markets, it is a strategy that both countries copied from the U.S.’s National Security Advisor (January 1969 to November 1975) and Secretary of State (September 1973 to January 1977), Henry Kissinger. A brilliant geopolitical strategist, Kissinger was one of several U.S. politicians who understood that the 1973 Oil Embargo had marked a fundamental shift in the world balance of power, just as Sheikh Yamani had said, and wanted to make sure that it never happened again.

Without having sufficient quantities of oil itself, the U.S. had little option but to continue to deal with Middle East countries but, he reasoned, the U.S. could exert influence over them if they could be weakened through their division. This division could be done across nationalistic lines, as was highlighted by the U.S. sponsorship of the 1979 Egypt-Israel Peace Treaty, which caused chaos in the Arab world, as did the subsequent assassination in 1981 of the Egyptian President who signed the deal, Anwar Sadat.

Or it could be done intra-nationally (and intra-regionally) through the stoking of religious sectarian tensions in key target countries, such as Iraq and Syria most notably in recent times. Kissinger’s policy of ‘constructive ambiguity’ is now being used by Russia and China but with the twin aims of enhancing their hydrocarbons power (through greater access to supply and distribution, and therefore, pricing) and of turning the Middle East against the U.S. and the West (using those historical pre-conceptions of the Arabs mentioned above).

Given the clever use of Kissinger’s strategy against the U.S., there is no reason to believe that the ongoing shift in the Middle East towards the Russia-China axis of influence will not continue apace.

Since the U.S.’s withdrawal from the Iran ‘nuclear deal’ in 2018, its withdrawal of troops from Syria (2019), former President Donald Trump’s ‘ending endless wars’ speech(2020), its full withdrawal from Afghanistan (2021), and  the end of the combat mission in Iraq (2021), there have been a slew of massive and multi-faceted deals, often weekly, between Middle East countries and either Russia or China. Most notably, perhaps, in all of these are those involving Saudi Arabia. These have been building in significance and intensity ever since Russia came to its aid at the end of the 2014-2016 Oil Price War to bolster the then-shattered influence and reputation of Saudi Arabia and OPEC, to form ‘OPEC+’.

These Russian moves have been augmented on China’s part by what Saudi Crown Prince, Mohammed bin Salman, still regards as a huge personal favour offered to him by Beijing in order to allow him to save face over his disastrous plans to float Aramco. For Saudi Arabia, cutting all but the most essential links to the U.S. will also allow it to keep oil prices high – exactly where it wants and needs them for its own financial and geopolitical benefit – and not to be beholden either to the U.S.’s (or the West’s) economic or political imperatives for keeping energy prices lower than where they are now.

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  1. Samuel Conner

    re: this line: Russia’s foreign policy broadly is to create chaos and then to project Russian solutions, and therefore power, into that chaos, and China’s broad foreign policy under its multi-generational power-grab ‘One Belt, One Road’ program is to project money, and therefore power, into that same chaos.

    I wonder if by “create chaos” he means, “disagree with the chaos preferred by Western nations”.

    I stopped reading there.

  2. Lex

    I guess I’d like some proof from the author about what Russia and China are doing rather than vague assumptions that sound like classic, American projection. But I understand that wasn’t the point of posting the piece. Since I think the author is wrong on the reasons, I’ll provide my own.

    Saudi behavior over the last few years but especially the last six months are strongly indicative of waning US power in the world. Some of it is personalities, MBS isn’t a fan of the US the way previous Saudi rulers have been. But personalities rarely push geopolitics except around the margins. The Saudi calculation is practical. They see the arrow of history’s direction and are following. They also see that Russia and China have been steady in their policy, built strong diplomatic relations, etc while the US can’t be predicted for more than four years. They also see that the US expects the KSA to do what it’s told, when it’s told. Oddly, they’re not super excited about that.

    And finally, nobody would have stabbed Caesar if Brutus hadn’t done it first but once Brutus landed the knife everyone who dreamed of doing it was ready to stab too.

    1. vao

      There is another element that is grounded in the 1945 deal between Abdulaziz and Roosevelt:

      the U.S. would receive all the oil supplies it needed for as long as Saudi had oil in place, in return for which the U.S. would guarantee the security both of the ruling House of Saud and, by extension, of Saudi Arabia.

      For the past couple of years, there have been persistent rumours that Saudi Arabia has reached its peak extraction capacity, and that the depletion rates of its giant oild fields (especially Ghawar) are much faster than previously assumed. In other words, the premise “as long as Saudi Arabia has oil in place” is on a (long) path to become invalid.

      From this perspective, it means that in the medium term

      a) the protection of the USA might no longer be guaranteed to the level provided heretofore — hence, re-balance relations towards the powerful players China and Russia, find a modus vivendi with Iran, Turkey.

      b) Saudia Arabia must develop economic activities that will replace the hydrocarbons extraction sector — hence, maximize oil revenue right now to sustain the required investment, even if it displeases the USA and Europe.

      1. digi_owl

        Their last hurrah may have been when they brought the market to a crash when trying to fund their part of the Syrian civil war.

  3. Daniil Adamov

    Was Kissinger all that brilliant? I have been reading up on him at a slow pace, and so far I am underwhelmed. It seems to me that a lot of what he did was fighting phantoms (and getting people killed in the process). The alliance with China seems, on the one hand, unavoidable given the level of Sino-Soviet tension at the time (so were Kissinger and Nixon really the only ones who could bring it about? How much credit do they deserve for a ripe fruit falling into their hands?), and on the other hand, more beneficial to China than to America. The “Soviet expansionism” that he banged on so much about was mostly a joke. The détente never really got anywhere due to US domestic opposition. I am not entirely sure what his accomplishment in the Middle East is supposed to be, according to this – dividing the Arabs? But it seems to me that the Arabs were already plenty divided.

    Am I wrong? Has he accomplished anything truly outstanding outside of his own career?

    1. nippersdad

      I have the same low opinion of Kissinger that you appear to have. I firmly believe that the US (and the world) would have been a much better place now had Kissinger and Brzezhinski graciously bestowed their issues on some country one cannot find on a map and not inflamed anti-Russian tensions here at home for fun and profit.

      One hates to wish them on Andorra, or some place like that, but they would have done much less harm there.

      1. Daniil Adamov

        I certainly do not care for his moral character (though Brzezinski, with his support for the Khmer Rouge for no better discernible reason than spite towards Vietnam, somehow seems even worse). But even by his own proudly asserted standards of ruthless realpolitik, Kissinger seems to come up short. The man talked (and still talks) a big game about being clearheaded and pragmatic, but his results when he was in a position of power seem to contradict that – unless I’m missing something big.

        Contrast with, say, Bismarck – also very fraught morally and some of his legacy was arguably also disastrous (though personally I am not sure how much of the blame for the disaster rightfully belongs to him), but in his time he certainly got many visible and useful results on the behalf of the polity he served/controlled.

      2. Anthony G Stegman

        I agree with you. Kissinger, like Fauci, is master of self promotion. He used his accent and Harvard pedigree to great effect bamboozling the simple minded. Did Kissinger end the war in Vietnam? Did Fauci end the AIDs crisis, and now the COVID crisis? The answer is no to all these questions. Both figures prolonged crises, rather than bring them to an end.

  4. Hickory

    “ Without having sufficient quantities of oil itself, the U.S. had little option but to continue to deal with Middle East countries”

    … or reduce usage by for example investing in public transit, reducing military expenses, building walkable communities, etc.

    1. nippersdad

      I remember how excited I was at the prospect of getting power directly from the sun when Carter put solar panels on the White House. It is hard to think what could have been had we continued on such trajectories, but my Dad’s career was based upon building new cities on the other side of the city just outside of our city.

      I can remember when we had dairy farms inside the Atlanta city limits, and now North Georgia is just one gigantic suburb that hardly anyone can really afford to live in.

    2. digi_owl

      The US cultural center is that of the eternal frontier nation.

      And one element of that is the image of the cowboy on the horse, that can at any time start anew by riding off to the horizon.

      In modern day, the automobile has replaced the horse.

      So it will take a cultural tectonic shift for USA to move to public transport in any meaningful way.

  5. orlbucfan

    Kissinger was, is, and always will be an evil, malignant, warmongering creep. Naturally, his type seems to live forever, the curse upon all other decent humans who want to live peaceful lives. What is the slime mold now, 99 years old? Ridiculous!

  6. John Beech

    Diplomacy is like a cross between 3D chess and a magician. So you don’t want to watch the birdie in this hand with regard to the Arabs and why they’re sticking their finger in the President’s eye because it ignores what the other hand is doing, which are the moves he (President Biden) makes with Iran.

    Me? Of all the moves we’ve done to advance our country’s interests over the decades, I regret making an enemy of the Persians most of all. I believe we owe it to them to make an unconditional apology. Start there. Unconditional. Next, help them put the mullahs in their place, meaning depose them and place them separate from the political process and not heading it, like it was before we interfered.

    Do I fail to see the inherent contradictions in what I am saying? Nope. But we owe them the sincere apology, and we owe them our best effort at restoring what they once had, the democratic vote.

    1. Daniil Adamov

      Apologies for what? Sanctions?

      In any case, I don’t think America’s track record of modifying other countries’ political systems through subtle influence is very promising of late. Although it is at least less destructive than America’s record of modifying other countries’ political systems through military intervention.

      1. Altandmain

        The US overthrew the government of Iran in 1953. An apology for the action is long overdue.

        1. Daniil Adamov

          Ah, that. I suppose that would be nice, but it would only be a gesture. I also wonder how much the modern Iranian government cares about that old Iranian government, given their ideological differences – though I suppose the coup would be a lasting grievance either way.

        2. digi_owl

          I suspect that USA wants to see the Ayatollah prostrate himself before the president for the embassy debacle first, and thus nothing will change.

          Iran and Cuba are two sore spots of the collective pride of DC.

        3. drumlin woodchuckles

          Great Britain overthrew that government, with secondary help from America. Iranians remember ALL the bad actors in that event.

        4. Valerie from Australia

          I SO agree! After reading, “All the Shah’s Men” I have never believed what the CIA or the MSM have said since. What a place the world would be today if the US hadn’t overthrown Mosaddegh and had worked to build up Russia the way we rebuilt Germany after WW2. The U.S. has a lot to answer for and History will not be kind to us.

    2. Anthony G Stegman

      An apology will never be forthcoming, for a variety of reasons least not the powerful Jewish lobby which needs the Iran bogeyman in order to justify all of the horrid Israeli aggression.

  7. Kouros

    The author is spreading some big toadsies:
    US/Trump has not pull its troops from Syria. In fact bureaucracy did everything in power to avoid that, and succeeded.
    US troops in Iraq are fine and well. Same troops, different label… The US has threatened Iraq that it will seizes its assets in US, about $35 billion USD if it forces US military to leave Iraq…

  8. Jeremy Grimm

    I may be mistaken, but has not the u.s. used its control over the Saudi oil as a tool in its foreign policy for enforcing u.s. hegemony — much as it uses control over food production? If so, the increasing Saudi alignment with Russia and China seems a major blow to u.s. hegemony. I believe the sales of weaponry is another tool of u.s. hegemony. The successes of Russian weapons, strategy, and tactics in the Ukraine place a dark shadow over u.s. weapons and military capability. All told, the u.s. Power Elite have demonstrated truly remarkable abilities to bring about their own collapse through mishandling Saudi Arabia and other oil producing nations, through the long term support of rampant looting of the u.s treasury by the MIC and Pentagon Brass, and through an utter misapprehension of it weakness as it concocted self-defeating and moronic diplomatic policy and self-injuring trade sanctions. The full costs of these failures will only become known as the next year turns and waxes, and those costs could be very great indeed. The u.s. Power Elite appears to have engineered a great acceleration of its collapse. This leaves the rest of us with even less time to find some way to prepare and find some where to dig in for hard times.

  9. ChrisRUEcon

    A stunning shift of erstwhile servant to master. The US needs Saudi Arabia more than the Saudis need the US, and that fact is bearing out as the new multi-polar role emerges.

    This paragraph raised an eyebrow:

    It is also this history and these ideas that are being used by Russia and China to stoke further discontent within the region. Russia’s foreign policy broadly is to create chaos and then to project Russian solutions, and therefore power, into that chaos, and China’s broad foreign policy under its multi-generational power-grab ‘One Belt, One Road’ program is to project money, and therefore power, into that same chaos.

    Who’s doing what, now??

    Someone’s already mentioned the CIA overthrow of Iran’s government … which is sufficient testament to the US role in “chaos creating” and “multi-generational power grabs”.

    1. drumlin woodchuckles

      I found that same paragraph and also find it to be a rather silly upside-down view of reality. Whoever it is that makes foreign policy nowadays for the DC FedRegime is fostering chaos wherever it can, especially over regions it has discovered it can not profitably rule.

      ” If we can’t have it, then nobody can ever have it.”

      As to One Ball One Chain, it is very simply to organize the takeover of as much resources within China’s transport system reach to China’s benefit so that China can be the Last Economy Standing when all the others fall. And to create a Greatest Ever China Co-Prosperity Sphere in the meantime. There is nothing mysterious or mystical about that.

  10. Valerie from Australia

    What I want to know is how many wars is the U.S. going to fight? Russia, China, Iran?

    The U.S. has continually aligned itself with the foulest of regimes – including the Saudis – in order to remain the unilateral hegemon. The last signs of a dying empire is to bankrupt its country with too many foreign wars. It not only spreads its military too thin but it bankrupts the treasury.

    Already South America is shrugging off the yoke U.S. Hegemony (Yay!) China is comporting itself with dignity and restraint whist taking a stand – and even Russia is acting with restraint. No wonder our former vassal states (allies) are looking for the opportunity to align themselves with other nations.The U.S. is doing its usual thing, propping up the vilest splinter groups and parties that wouldn’t exist beyond the margins without U.S. intervention. Zelenskyy’s government in Ukraine is an obvious example. The tragedy is so many ordinary people suffer. I’m sure sure many Ukrainian soldiers would love to leave the hopeless war but are afraid of prison. What a complicated and evil we (our kleptocrats) have woven.

    I am not surprised our foul bedfellows smell blood and have turned on us. We used them – they used us.

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