From Bloomberg News and iHeartRadio. It's the big take. I'm Westksova today. The growing rift between the US and Saudi Arabia threatens to drive up oil prices and the risk of a recession. Saudi Arabia is the biggest producer in the twenty three nation OPEK plus oil cartel. Despite repeated US requests to keep oil production high, the Saudis and the cartel have instead moved to cut it back, which of course means more expensive gasoline, among other things. But
why are they doing that. There's a lot at work here, so I'm calling in reinforcements. National Security editor Nick wadhams.
It feels from Washington like you're seeing a complete breakdown in this relationship that has been of such strategic importance for both sides.
Bloomberg's chief Emerging Markets economist Zia Daoud, who's recently written about the potential economic consequences of US Saudi tensions if you.
Look at what analys are expecting there, expecting oil prices to be above eighty dollars per barrel over the coming years.
And Bloomberg's chief economist Tom Orlek.
It's not too hard to imagine a production cut ahead of the twenty twenty four presidential election, pushing up prices at the pump, hurting the chances of Joe Biden or whoever else is running.
See out in your story. You're right that the price of oil, the world's most valuable commodity, is now being set by a country that the US can no longer call a friend. What did you mean by that.
Well, for a long time, the US and allies in the West had allies and support within OPEC. So when the market is tied, they relied on these allies within OPEK to increase production and tame all prices. That was the case in Iran in the sixties and seventies. But then Saudi Arabia became the dominant friend in Alli of
the US. There was sort of a pact between Saudi and the US where Saudi secured energy supply and make sure the energy supplies to the US are ongoing, and if there's any trouble they could jump in and add more supply to tame all prices, and in return, the US secured Saudi Arabia against external threats. What we're seeing right now over the last couple of years is that this pact is coming under threat and is fracturing, and that has an impact on the oil market as well as the global economy.
So let's not pretend that oil prices have been super stable over the last decade. Right, We've had periods of really high prices after Russia invaded Ukraine, for example. We've had periods of pretty low prices when there were deep concerns about global growth. Even so, that kind of uneasy friendship that packed between the big oil consumers and the big oil producers was a force for things being more stable than they would otherwise have been. And now the
risk is that that's taken away. Now if oil prices are going to be set based on the interests of the producers, basically that's going to mean that they're higher. Side wants to pay for its ambitious plans to build futuristic cities in the desert, they need oil prices north of eighty dollars a barrel. If Russia wants to balance its books as it pays for its enormous war of aggression in Ukraine, it needs oil prices one hundred dollars a barrel or higher. And those higher oil prices they
stuff the coffers of the oil producers. But for the oil consumers, US households, European households, US businesses, European businesses, they mean higher prices and that means higher inflation. For the European Central Bank and the Federal Reserve, that means the need for more rate hikes, and for the European economy and the US economy, it means more risk of recession.
Is the OPEC made a big announcement and April second, can you describe what that is and where the fallout is being.
The decision was to cut oil output. The headline numbers are north of one million bells per day and just for context, Well roughly consumes about one hundred million bells a day, so that's basically a cut of one percent of global supply. The surprising bit is the actual decision
as well as the numbers. But the actual decision was a big surprise because until maybe February, the Saudis were hinting that the production costs they implemented in the past were going to continue, which is why the decision surprise markets when it happened. Now, the other thing that is important here is that this is the second time the oppec plus cuts oil output since President Joe Biden went to Saudi Arabia last July asking specifically for more supply.
I'm doing all I can to increase the supply for the United States of America, which I expect to happen. The Saudi shared that urgency, and based on our discussions today, I expect we'll see further steps in the coming weeks.
So he went last year to Saudi asking for more supply, and twice opek plus delivered the opposite of that, and that is an indication of where geopolitics is playing out of financial markets, energy markets, and the global economy.
And I would just add, you know one thing on that zied that I found so fascinating, especially with the cuts last year. I mean, it wasn't only that that was a surprise to the US. It was that the US actually thought they had reassurances from Saudi Arabia that it would not cut supplies. So not only is Saudi Arabia surprising the United States with some of these cuts, but it's actually doing the opposite of what US officials
say it promised to do. So it feels from Washington in a lot of ways, like you're seeing a complete breakdown in this relationship that has been of such strategic importance for both sides.
And speaking of surprises, can I add another surprise that Saudi delivered to the US in the last month, and it wasn't economic, it was geopolitical. So Saudi decided to ease tensions with Iran, and that was surprising by itself. But the biggest surprise was that the deal to restore diplomatic relationship between the two countries was actually broken by China and signed in Beijing.
The USOFAR has not responded with alarm, but Washington is not happy about this, clearly, right.
I think the US response this time was quite instructive because the last time that OPEC cut production last year before the midterms, the US went very strongly in its public response, and there was some criticism internally that it made the Biden administration look petulant and weak and whining a little bit about how this country that the administration had promised not to cut production in fact went ahead and did so. So you're really seeing a much more
understated response here. But you know, behind the scenes, this is still very much a live debate in a lot of ways. Saudi Arabia represents the real schizophrenia when it comes to US policy. So this issue of interests versus values, there's so much talk, particularly under Joe Biden, that he wanted his foreign policy to be built around values, democracy, human rights, things like that versus interests. So who are important strategic partners to help counterbalance against adversaries in the
region like Iran? And he's never really been able to find that balance. It's properly you know, when President Biden comes into office and calls Saudi Arabia's crown prints essentially a pariah and ices him out, and.
I would make it very clear, make them in fact the pariah that they are.
It creates a great deal of animosity and uncertainty about the constancy of that security partnership. So then when Saudi Arabia, as it looks like, is now responding and taking actions based on its own interests, you've really seen the US scramble to respond, and it just doesn't feel like they've been able to settle on a strategy to deal with Saudi Arabia that would reconcile those two aims that the Biden administration has.
How did we get here? Because for many years. This relationship was very productive for both sides, even if both countries had different political systems and different larger aims.
Yeah, I mean, there's this famous photograph if President of Franklin Roosevelt with King Saud in February of nineteen forty five, as World War Two is winding down, the United States basically makes clear that Saudi Arabia is going to be the central strategic partner in a very volatile region for
the decades to come. And you know, there have been certainly a lot of ups and downs over the years, but the First Gulf War, Saudi Arabia served as a basing point for US troops, and then relations took a real downturn after the September eleventh attacks when it was
revealed that some of the attackers were Saudi's. But the hit that really put us where we are today was the killing of the Washington Post columnist, Saudi dissident Jamal ka Shoji, and he was killed at the Saudi consulate in Istanbul, and that really provoked a new round of soul searching by Washington, and even the Trump administration that had very friendly ties with the Saudi's found itself essentially backed into a corner where they couldn't not come out
and condemn Saudi Arabia, especially given that it looked like the knowledge and potentially ordering of Kashoji's killing went all the way to the top. So everything we've seen in
the time since has been overshadowed by Kashoji's killing. And the administration came out very strongly against the Crown Prince after President Biden came into office, but then realized, you know, maybe they had gone too far and they would need to wind that back a little bit because of the threat posed by Iran and so many other issues, and the fact that they still need it. Turns out, as we've been talking about, they still need Saudi Arabia so much to help keep oil prices down and to serve
as a counterweight to Iran. So again we're in a position where the Biden administration really has struggled to figure out its policy towards Saudi Arabia, but is growing increasingly unnerved now that it looks like Saudi Arabia's Okay, we can't rely on the US, We're going to turn to other countries like China.
I think the Saudi perspective on security is actually interesting because it's easy to focus on the relationship right now between the Saudi Crown Prince Mohammed bin Salman, who's the grandson of Cadelasizasotos in that photo that Nick was talking about, and President Joe Biden in the US. But there is
a bit of history to this as well. You know, if you go a bit further back in time, twenty nineteen, there was an attack on Saudi All facilities that took half of Saudi All production off the market in an instant.
I want you to imagine here that eighteen drones, a swarm of drones came in just about a week ago in the early hours of the morning of four am and hit precise targets like the one behind me.
Trump was president back then, and Trump was really friendly to Saudi. Yet nothing happened, you know, to protect Saudi from these attacks or to basically punish whoever did it back then. If you go even further back in time, Saudi Arabia was semi openly disappointed with the Obama administration because it perceeded to have supported the Arab Spring, the Arab protests in twenty eleven, which led to the toppling
of some regimes that Saudi Arabia was friendly to. And it's also if you go up further back in time when Obama came to presidency and there was this pivot to Asia, and I think Saudi Arabia and other countries in the Gulf felt that the US was was withdrawing from the region and that exposed them from a security perspective.
So in some sense, the Share Revolution, which hedged the US partially economically from rising all prices, may be also led to some disinterest in the region where Saudi Arabia is in, and that led it to look for other options for security guarantees.
After the break could oil producers plan and October Surprise in the twenty twenty four elections to help Joe Biden's opponent The Idea and Nick both mentioned this iconic photograph of President Roosevelt and the King of Saudi Arabia back in nineteen forty five, and that's when the US and Saudi Arabia signed this Oil for Security Pact, which formed the basis of the relationship between the two nations for decades. Can you explain what that was and how it's evolved.
Well, I think that the pack goes further back in term to the discovery of oil in Saudi Arabia and then American companies actually went there to extract the oil. The terms of the pact are really simple. Saudi Arabia was a big oil producer. It is the largest exporter of oil in the world. The US has the largest economy in the world and has huge energy needs, and
the pact was simple. We exchange the access to energy and oil that is in the region in the Gulf in return for guaranteeing Saudi's security, because US is not just the largest economy the world is actually the strongest army and has the most vast weaponry, et cetera. And that pact has been in place for decades, with some hiccups along the way, but it's probably right now. It's facing it's most testing times. If I have to say that.
What does that mean for oil prices and its effects on the world economy, I think.
There's a few pieces to it. Whereas so, firstly, if we think about the US side, we've got that conflict between values and interests which Nick spoke about, and certainly the Saudis do not like being vocally condemned as human rights violators. We've got the US shale revolution, which is given the US a source of energy independent from Saudi Arabia and Russia and the Middle East and reduced that dependency.
And we have the looming transition from climate change and the aspiration to move towards a net zero economy, and all of these things have convinced Saudi that the US is not the reliable partner that they hoped they would be. Now at the same time as this is happening, the US is weight in the global economy, and so the US's importance to Saudi as a driver of oil demand is still there, but it's not what it was. Big emerging markets China India are rising up the global GDP rankings.
That means their demand for oil is rising as well. And at least on China's side, their economic rise is being matched by a rise to play a larger role in global affairs. That's why we've got Shijinping playing the blessed of the peacemaker's role bringing Saudi Arabia and Iran together. That's why we've got China aspiring not just to buy oil from Saudi Arabia, but also potentially in the future to buy that oil in Chinese yuan rather than in US dollars.
Zee.
I'd given all of the tensions that we've been talking about today, where are oil prices heading? Because it doesn't exactly look great.
Well if you look at what analysts are expecting, they're expecting all prices to be above eighty dollars per barrel over the coming years. And I think what is driving this projection is three things. First is the economics. We've talked about how OPEC plus members like Russia, like Saudi Arabia, like Iraq have large spending needs and they need higher
oil prices to cover them. The second factor is politics, and we've talked a bit about the fracturing Saudi US relationship and how Saudi Arabia is willing to upset the US with the production cut if its funds is on spending needs. And the third factor is shale oil. So shale oil used to provide a sort of a competitor to OPEC plus because when all prices rose, that meant shale became more profitable, and that meant that more supply
would come to the market, depressing price. That's no longer the case, because shall is more focused now on delivering profits to their shareholders rather than expanding output. So I think that's the next few years. I think beyond this, we know that with every oil supercycle we get a downturn, and the downturn happens because high profits attract new firms into the market, which increases supply and depresses prices.
I mean Zied mentioned at the beginning of this that we've had two surprises from Saudi since Biden took that trip to readd and ask them to increase production. Twice since then, Saudi has led OPEC plus in not production increases, but production cuts. Already bad news for the United States, but let's just briefly explore a scenario where it could
be even worse news. Let's throw the calendar forward to the end of twenty twenty four and imagine a scenario where there is an OPEC production cut ahead of the twenty twenty four presidential election. Now, I'm sure Big Take listeners are familiar with the concept of the October surprise, something big that happens which upsets the outlook for a presidential election just before voters go to cast their ballots.
In fact, the origin of the October surprise goes all the way back to nineteen eighty where Jimmy Carter was very much hoping that US hostages would be released from Iran before the election and boost his election chances, and in October he was forced to acknowledge that wasn't going to happen, and that was widely seen as one of the factors which caused Carter to lose the election and
Reagan to win the election. Now, with Saudi drifting out of the US's orbit of influence and into the orbit of influence of China and Russia, it's not too hard to imagine something similar happening again. A production cut ahead of the twenty twenty four presidential election, pushing up prices at the pump, hurting the chances of incumbent Joe Biden or whoever else is running on the Democrat ticket, and giving the Republican nominee a boost.
When we come back. Can the US Saudi relationship be fixed? Nick? As you said earlier, the Biden administration has not quite settled on a stable policy when it comes to Saudi Arabia. What are they doing to try to fix things, to try to bring some stability to that relationship of anything.
Well, I think one thing you're seeing is they're trying to take the debate out of the public realms. So that gets to why the administration has been relatively restrained
in its response to the latest cuts. The other thing is that the administration is going to really struggle because a lot of what's going to happen with Saudi Arabia is going to be taken or has the potential to be taken, out of their hands because there are some members of Congress, particularly in the Senate, Democratic Senator Chris Murphy, who really want to downgrade the US relationship with Saudi Arabia, and one of the ways he wants to do that is by driving a stake through the heart of this
security relationship and really seek to throttle back weapons sales to Saudi Arabia. That's going to pose an existential question for the Saudis because Saudi Arabia's military is basically seventy five percent of its components and military machinery or US made, including its fighter jets and a lot of very very
important equipment. So if the United States, because of pressure from Congress, which has to approve these sales, decides that it's going to throttle back that security partnership, that is naturally going to cause the Saudis to look elsewhere. So one of the things I'm really looking at in the next year or so is how much the Biden administration
can actually do. They announced last year, before the previous oil cut, a major new weapons sale to send about two billion dollars in Patriot missile batteries and missiles to the Saudis, which is just the sort of air defense material that the Saudis want. But you know, that stuff has to go through Congress. And if Congress starts to say no, we're not going to sell you this stuff that is just right at the heart of this partnership and has been for decades, what does that lead the
Saudis to do. There are plenty of countries like China and Russia that will be willing to supply Saudi Arabia with all the weaponry that it wants.
Should people be worried, you know, should we start to make decisions anticipating that oil prices are going to become a problem in the foreseeable future.
It is hard to predictable processes. It has been well known and predictions usually end up in embarrassing the forecaster. But I think if you look at what the markets are expecting short term, they expect the market to be tight, meaning that supply will fall short of demand. In fact, even Opek thinks that the market will have a short fall of oil towards the end of this year after the cut. And I think if you look at the long term picture, we're going to get into renewables, We're
going to get switched from fossil fuel to renewables. I think the key question here is when does the short term end where we have high oil prices and a tight market, and when does the long term begin where we have the switch and the transition away from oil. But I think that's the key question that's facing both consumers and producers oil.
The Tom Nick thanks so much for coming on the show.
Thanks for having us, Wes, thanks for having us, Thank.
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