Obama meets with Saudi king. Could they counter Russia with oil?

As President Obama meets with the Saudi king in Riyadh Friday, he is almost certain to discuss the Ukraine crisis and how to respond. Could the US and Saudi Arabia coordinate a release of oil that would punish Russia's energy-dominated economy? 

By , Guest blogger

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    Saudi Arabia's Crown Prince Salman bin Abdulaziz Al Saud, escort President Barack Obama to his meeting with Saudi King Abdullah at Rawdat Khuraim, Saudi Arabia, Friday.
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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. (Related Article: Showdown in Ukraine: Putin’s Quest for Ports, Oil, Pipelines and Gas)

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. 

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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. (Related Article: Russia Looks East as Relations with Europe Deteriorate)

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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