Oil Crisis Grips World By The Throat
The battle over the price of oil is heating up.
The Biden administration accused OPEC with siding with Russia in the Ukraine War. OPEC denies it.
Who is right and what the heck is going on?
There are many ramifications to the current situation:
• This is a significant break in the 70 year alliance between Saudi Arabia and the US.
• The price of oil will increase short term but decline long term
• Both sides are right
Let’s look closer at the situation.
In 1973, the Arab nations of the Middle East shocked the Western World with an oil embargo that shot oil prices higher.
But the reality was that the Gulf nations were very weak militarily. The US could have taken over Saudi Arabia in a heartbeat. But they didn’t. Instead, they agreed to the price hike and the shift of control of the oil from Western oil companies to the Saudi Kingdom in return for recycling most of the proceeds into Western, and particularly US, financial institutions. Everybody was happy.
That arrangement has held all these years until recently. Now it is being threatened with breaking apart.
First, let’s look at the situation in Saudi Arabia. Mohammed Bin Salman , commonly known as MBS, is the Crown Prince of the country. Technically his father is the head of the country but has been ailing for many years so the country is really run by MBS.
He has shown himself to be a forceful personality. Witness him imprisoning fellow royals (in the Ritz Carlton Hotel) and not letting them out until they handed over billions of dollars to the Saudi government. He is working hard to modernize the country, increase non-oil business, yet still maintain it’s role as the protector of the most critical Muslim sites. He is also under pressure to share more of the oil wealth with the common people and not just let the royal family reap the harvest.
“We were going to, in fact, make them pay the price, and make them, in fact, the pariah that they are,” Biden said at a 2019 Democratic debate.
This insult did not sit well with MBS. Biden also called them a rogue state.
At the same time, new president Biden started an attack on the energy sector in the US which led to a lack of investment in the US oil industry and, more importantly, to higher oil prices. Later, Russian invades Ukraine and that boost oil prices higher. But most importantly, the Fed double money supply and the Biden administration throws trillions of dollars into the economy. This money went directly into commodity prices and oil price sky rocketed to $120 and gas prices to $5 a gallon.
This then created a weakening economy and a drop in real wages as inflation shot to levels not seen for 40 years. This then hit the popularity of the Democratic Party just the US was entering the mid term election season. Polls were devastating to the Democrats.
So the president of the US calls MBS and the head of the United Arab Emirates to try to persuade them to boost oil production to reduce the price of oil. They don’t take his call. They snub him. Why?
First, his insults of MBS.
Second, he stopped supporting the Saudis and Emiratis in the war in Yemen. These two countries are Sunni Muslims and are fighting a proxy war with Iran which is the biggest Shiite Muslim country. Both sides have dogs in the Yemen war. The US withdraw it’s support of the Sunnis when Biden got elected.
So the Arabs snubbed the president of the US!
But things were getting worse in the US. So Biden decided to fly to Saudi Arabia to try to persuade MBS to turn on the spigots. Begging? The US says no but the world sees that he is.
Then Biden makes a big mistake.
He confronts MBS about the killing of Jamal Khashoggi. The US says MBS approved the killing but the Saudis say they were innocent and point to similar episodes in US history. Who is right? I don’t know because both parties have been know to lie.
But the point is that Biden confronted MBS to his face!
So why would the Saudis support Biden’s request?
I see the news that they are cutting production to be a major slap in the face of Biden. “You beg me for more oil but insult me? Nah, no oil for you!”
Is this the end of the US/Saudi alliance?
I don’t think so but we should be nervous that it is now on quicksand.