New US Oil Field Developments Are A Sign Of Things To Come For Saudi Arabia

Authored by Simon Watkins via OilPrice.com,

• Due to the exceptional efforts of U.S. Secretary of State, Antony Blinken, and his team, the Israel-Hamas War has not widened into a war that could have disastrous consequences for the oil price, but it may yet do so.

• By 2014, the Saudis believed that the U.S.’s shale oil and gas posed an existential threat to Saudi Arabia’s place in the world and to continued rule of the Al Saud royal family

• In oil and gas terms, the U.S. has broadly gone from strength to strength. As of now, it is the number one producer of crude oil in the world, and the number one natural gas producer.

Events often have a way of highlighting the circular nature of time rather than its linearity. An extraordinarily notable recent example of this was this year’s incursion into Israel of Hamas on Yom Kippur, just as happened on Yom Kippur 50 years earlier when an Arab coalition did the same. In the same way that the recent incursion resulted in the ongoing Irael-Hamas War, so the events of 1973 led to the Yom Kippur War. So far, due to the exceptional efforts of U.S. Secretary of State, Antony Blinken, and his team, the Israel-Hamas War has not widened into a war that could have disastrous consequences for the oil price, but it may yet do so. In 1973, though, the Yom Kippur War led directly to an embargo by OPEC members – plus Egypt, Syria, and Tunisia – on oil exports to the U.S., the U.K., Japan, Canada, and the Netherlands in response to their collective supplying of arms, intelligence resources, and logistical support to Israel during the War. By the end of the embargo in March 1974, the price of oil had risen around 267 percent, from about US$3 per barrel (pb) to over US$11 pb. This, in turn, stoked the fire of a global economic slowdown, especially felt in the net oil importing countries of the West. However, from a long-term perspective, even more important than any of this was the way it changed U.S. policy towards Saudi Arabia and OPEC from that point. Judging from recent announcements from the U.S., the current Israel-Hamas War may have prompted the final phase of that policy made back in 1974.

At the end of the embargo in 1974, some branded it a failure, as it had not resulted in Israel giving back all the territory it had gained in the Yom Kippur War. However, in a broader sense, a wider war had been won by Saudi, OPEC, and other Arab states in shifting the balance of power in the global oil market from the big consumers of oil (mainly in the West at that time) to the big producers of oil (mainly in the Middle East at that point). This shift was accurately summed up by the slick, clever and urbane then-Saudi Minister of Oil and Mineral Reserves, Sheikh Ahmed Zaki Yamani, who was widely credited with formulating the embargo strategy. Crucially for what followed in terms of U.S. policy, one titanic figure in Washington agreed with Yamani’s view, and this was the late Henry Kissinger. A extremely influential geopolitical strategist who served as U.S. National Security Advisor from January 1969 to November 1975, Secretary of State from September 1973 to January 1977, and senior adviser to many U.S. presidents after that, Kissinger came to three key conclusions based on that 1973/74 Oil Crisis, analysed in full in my new book on the new global oil market order.

The first was that the U.S. could never truly trust Saudi Arabia again, as it had broken the underlying ethos of the foundation stone agreement between the two countries made back on 14 February 1945 between the then-US President, Franklin D Roosevelt, and the then-Saudi King, Abdulaziz bin Abdul Rahman Al Saud, as also detailed in the book. This deal had run smoothly from that point to the onset of the 1973/74 Oil Crisis, and it was simply that the U.S. would receive all the oil supplies it needed for as long as Saudi Arabia had oil in place and, in return for this, the U.S. would guarantee the security both of Saudi Arabia and its ruling House of Saud. Saudi Arabia had clearly broken this covenant in leading the embargo on oil supplies against the U.S. Kissinger’s second conclusion was that the U.S. needed to expedite its efforts to become self-sufficient in energy resources as soon as possible, with a focus in the shorter term on oil supplies. He did not have any clear idea at that time when that self-sufficiency might come, as the shale oil and gas revolution was not even in the significant development stage at that point. Third, Kissinger concluded that the best course of action for the U.S. to keep obtaining all the oil and gas it needed to retain its top global economic and political position was to ensure that the Middle Eastern countries did not band together again in the future against the U.S. The optimal way for the U.S. to ensure this, he successfully argued, was to use the ‘divide and rule’ principle between the region’s major oil and gas producers, which in turn was a variant of the ‘triangular diplomacy’ he had advocated and used to great effect in the U.S.’s dealings with Russia and China at that time. In short, this involved playing one side off against the other by leveraging whatever fault lines ran through the target countries at any given time, be they economic, political, or religious, or any combination thereof.

There are multiple major examples of this policy at work analysed in my new book, but two of the most significant were leveraging the religious schism between Shia and Sunni Islam (as exemplified respectively by Iran and Saudi Arabia), and the undermining of resurgent ideas of pan-Arabism. In the case of the former, notable examples have included the U.S. invasion of Iraq in 2003, and its unilateral withdrawal from the ‘nuclear deal’ with Iran in 2018. In the latter’s case, notable examples include the U.S. sponsorship of the Egypt-Israel Peace Treaty, after which Egyptian President Anwar Sadat was assassinated, and the Arab–Israeli relationship normalisation deals. From 1974 to the 2014, this U.S. strategy was broadly successful in ensuring no re-occurrence of meaningful collective actions against it by Saudi Arabia and OPEC. However, by early 2014, it had become obvious to the Saudis that the U.S. had found a way that might ensure its energy independence in the future, as it had long wanted.

This was the rise of the U.S. shale energy industry, which began with gas in earnest in 2006 and with oil in 2010. From a modest start, U.S. shale oil production had risen by an average of slightly less than 0.2 million bpd in 2011 and 2012, but by 2013 the rise in output was virtually a straight vertical line. By 2014, the Saudis believed that the U.S.’s shale oil and gas posed an existential threat to Saudi Arabia’s place in the world and to continued rule of the Al Saud royal family. They were right on both counts, as the Kingdom’s only true power in the world comes from its oil resources, and the royal family’s power in the country is derived entirely from the wealth that it brings. At that time, though, the Saudis believed that if they destroyed – or at least significantly disabled – the then-nascent U.S. shale sector, then its oil power would endure for much longer. And it thought it could do this by launching an all-out oil price war in which it and its OPEC brothers would oversupply the market, pushing prices down to levels that would bankrupt the U.S.’s shale oil producers. The Saudis were confident this war would be successful, as they had triumphed in the 1973/74 Oil Crisis, and it was widely thought that the U.S. shale producers had a breakeven point somewhere above the US$70pb of Brent. All the details surrounding this 2014-2016 Oil Price War (and the later attempt in 2020 to do the same) are covered in depth in my new book on the new global oil market order. Suffice it to say here that things did not go Saudi Arabia’s way at all. And the economic and political catastrophe that resulted for Saudi Arabia was a key reason why it has drifted towards China’s and Russia’s sphere of influence since then.

Conversely, in oil and gas terms, the U.S. has broadly gone from strength to strength.

As of now, it is the number one producer of crude oil in the world, and the number one natural gas producer.

The final phase of sidelining the Middle East’s major hydrocarbons producers is continuing, with news that three new oil and gas lease auctions in the Gulf of Mexico have been signed off by the U.S.’s Department of the Interior. These will augment the many other new exploration and development conventional and shale projects announced over the past year by the U.S.’s big oil and gas firms. This even includes the greenlight for U.S. oil giant ConocoPhillips’s US$8 billion Willow oil and gas drilling project in Alaska.

If former President Donald Trump returns to the White House, as seems highly possible, this number would likely rise even more, with 47 sales across all U.S. coastal areas penned in during 2018 for his administration’s five-year offshore leasing program.