FPI / March 31, 2020
Analysis by Paul Crespo
The ongoing oil price war between Saudi Arabia and Russia has a significant impact on U.S. national security that few in the media seem to understand.
Thanks greatly to the rebirth of the domestic shale oil and gas industry, the U.S. became fully energy independent at the end of 2019 when it became a net exporter of both refined and crude oil. This was a major victory for the U.S., allowing it to reduce reliance of unstable foreign countries in the Middle East and elsewhere, and give it leverage over hostile oil producing countries such as Russia, Iran and Venezuela.
Crashing global oil prices now, while good for consumers in the short term, could damage the economy longer term, and harm U.S. national security by ruining the U.S. shale energy industry. And this is exactly what the Russians and other U.S. adversaries want.
While the Saudi’s technically launched the first salvo by ramping up production and lowering prices, this a response to Russia refusing to agree with OPEC to maintain prices amidst lessening demand — mostly due to the Wuhan Coronavirus (COVID-19) pandemic.
Saudi Arabia may be hoping to punish Russia and damage it’s economy, which is highly dependent on oil revenue, even though it may hurt the U.S.in the short run.
Meanwhile, Russia has its own agenda in wanting to hurt the U.S.
As noted in an earlier FreePressers article, “By Saudi Arabia actually now declaring war, they are ‘front-running’ the Russians in declaring war on U.S. shale,” according to Johannes Benigni, chairman of JBC Energy Group. Meanwhile, it is clear Russian president Vladimir Putin is retaliating against U.S. sanctions placed on Russia last year, and more recent sanctions this year against a subsidiary of Russian oil conglomerate Rosneft for supporting the illegitimate Maduro regime in Venezuela. Putin warned last year that Russia would retaliate at a time and place of its own choosing. It seems that now is the time, and the world oil markets is the place.
RBC Capital Markets analyst Helima Croft also blames Igor Sechin, the chief executive of Russia’s Rosneft Oil and formerly from Russia’s intelligence services more specifically as a culprit, “By triggering a price war in which Russia and the Saudis will flood the world with cheap crude, Sechin hopes to damage the shale-oil producers that have made the U.S. energy independent.”
Chris Flaesch CEO of Ravenna Associates, also explains in RealClearDefense, that Moscow rightly believes that American fracking-based energy independence underpins Washington’s ability to threaten Russia’s global energy politics. That was reinforced in early March when Putin met with Russian oil companies. At that meeting, Sechin, said that low energy prices “are great because they will damage U.S. shale.”
Despite the clear Russian agenda, much of the media is focused on demonizing Saudi Arabia for this price war. However, some experts argue we should be viewing this war as a Saudi battle for control of OPEC as much as a battle to hurt either the US or Russia. In The Media Line, Dr. Yoel Guzansky, at the Institute for National Security Studies in Israel, says he believes the Saudi motive has been to weaken the position of other oil-producing countries and to get even with Russia.
Danny Zaken, at Israel’s Sapir Academic College, suggests the former is the main reason, stating Saudi leader “Mohammed bin Salman is fighting for control of the oil market and OPEC” and feels it is financially able to endure lower prices.” Regardless of which is correct, the U.S. government is concerned over the crashing oil prices, and its impact on domestic shale producers.
President Donald Trump initially said he would use the dramatically lower oil prices to “top off” the Strategic Petroleum Reserve (SPR) — helping both domestic shale producers and the U.S. government. But that proposed $3 billion purchase was removed by Democrats from the $3 trillion stimulus bill just passed into law. Additionally, The Wall Street Journal reported that the U.S. would ask the Saudis to return to lower production levels and could prepare additional sanctions on Russia to show Riyadh that its rival would not benefit too much from bolstered prices.
However, Zaken argues that, behind the scenes, the United States backs the Saudi decision to decrease production. “It’s a game of who will be in control,” Zaken said. This could ultimately be good for both Saudi Arabia and the U.S. According to Guzansky, “One possible consequence of the oil price war could be the formation of an alliance between OPEC and the USA to replace the OPEC-Russia alliance.”
This is a highly fluid and changing situation, but if the Saudis can actually gain control over OPEC, and the U.S. and Saudi Arabia can manage to create a new oil producing dynamic between the two — especially at the expense of rogues such as Iran, Venezuela and Russia — this would be extremely good for U.S. national security.