The first of these cuts, with oil at around $90 per barrel, came at an unwelcome time for US President Joe Biden: just weeks ahead of US midterm elections. Biden envoys pleaded with Saudi officials to delay the cuts, to no avail.

Signs like these point to an increasingly nationalistic cartel that caters to the revenue needs of member governments—now including Russia—rather than to global interests in price stability. For US officials used to being treated with deference, Saudi ‘price hawkishness’ is yet another reason to reassess the special relationship, along with roughly $100 billion per year in US hard security spending in the Persian Gulf.

In this July edition of Rystad Energy’s thought leadership series REview, we discuss three potential outcomes of the OPEC+ strategy shift. The new strategy is rooted in the 2016 expansion that created OPEC+ when Saudi Arabia and Russia joined forces.

The first outcome is diplomatic. Biden initially threatened to impose “consequences” on Saudi Arabia “for what they’ve done with Russia,” as the president told CNN just after the October 2022 cut of 2 million barrels per day (bpd).² We examine why Washington has backed away from that threat and now seeks to lower the temperature. 

Second, we look at oil market reactions, and how OPEC+ supply decisions have yet to coax much more oil from shale plays in the US, but may soon do so in Argentina. Even so, we argue, the market is looking undersupplied as we approach the end of the year.  

Third, we look at the longer-term impact of the deeper inroads made by electric vehicles (EV) on American voters. In the future, US presidents may find themselves with leeway to actually impose “consequences” on Saudi Arabia, rather than just blustering.

Biden’s reappraisal of the “hard line” against Riyadh

Let’s start with what’s behind Biden’s softer stance. One factor must be a realization that Saudi Arabia crossed a threshold in October. Riyadh used its influence over oil prices in what looks like an attempt to turn US voters against a sitting US president. As far as we know, that’s a first.³

The Saudi leadership has long understood the negative correlation between America’s motor fuel prices and its president’s popularity.? In the past, the kingdom’s sway over US gasoline prices was reserved for helping the incumbent president by raising production. That way, gasoline prices were off the table at election time. 

A recent book by retired Saudi oil ministry adviser Ibrahim Al-Muhanna documents two such production increases. One was timed to help Trump’s allies in the 2018 mid-term and another that assisted Obama during his 2012 re-election campaign.?

Under Biden, the Saudis demonstrated that Riyadh’s help with the oil price needs to be reciprocated.? Biden’s climbdown showed that his options are constrained by Americans’ dependence on gasoline-powered vehicles. American cars tend to be larger and less fuel efficient than those in the rest of the world, which increases the nation’s exposure to Riyadh and its tweaking of world oil prices.? Biden’s newfound caution with Riyadh may arise from an unwillingness to tempt further production cuts by Saudi Arabia, particularly as Biden’s re-election campaign swings into action next year.

OPEC cuts and upstream opportunities for non-OPEC

What about the oil market reaction to those three rounds of OPEC cuts? Besides the 2 million bpd cut in October, the cartel cut roughly 1.5 million bpd in April. And Saudi Arabia “voluntarily” cut another 1 million bpd in June. By pushing prices higher—or at least preventing them from falling—these cuts are telling non-OPEC producers that the time to revive investments has arrived. 

But that hasn’t yet happened. The US rig count has been falling since April and total US crude production has only grown marginally since the beginning of 2023, to 12.5-12.6 million bpd – although the Energy Information Administration (EIA) still reports it at 12.3 million bpd, which we believe to be an underestimation. That’s well below the pre-pandemic high of 13 million bpd. 

This lackluster response from US producers comes despite the huge price increases in 2022, and even with current markets remaining well above the average breakeven of roughly $55 per barrel. The reality is that US shale production has become less elastic to price changes over the past three years, especially when compared to the halcyon era of relentless growth in the previous decade. 

The maturing character of shale is something OPEC and OPEC+ must have pondered carefully when deciding on their latest cuts. It appears that ‘shale 2.0’ is less menacing to OPEC than the ‘shale 1.0’ of the previous decade, when US producers took free rides on OPEC cuts and grabbed market share. With Wall Street demanding capital discipline – from public operators, who still dominate the shale landscape – rather than reinvestment, the threat of OPEC losing significant market share to US shale as oil prices increase appears to have declined. In the coming years, the supply elasticity of shale oil may become an increasingly Argentine phenomenon. Still, even if Argentina’s Vaca Muerta were to reach the milestone of 1 million bpd by the end of this decade, it will never come close to the size of Permian, and therefore it will not represent a major threat to OPEC.

Can EVs restore US presidents’ leverage over Riyadh?

Finally, our third argument. Contrary to popular belief, US presidents have little influence over oil prices in the short run.  If Saudi Arabia won’t abide by a president’s entreaties for a production increase, the president has the unattractive option of releasing emergency stocks held in the US Strategic Petroleum Reserve. Biden has done that.

The SPR releases have not helped US motorists very much though. We have argued in previous editions of this REview series that US gasoline prices on the east and west coasts — the most densely populated areas — are tied to Brent, not the US marker Nymex WTI. Hence, last year’s mega SPR release served to widen the price spread between WTI and Brent, with the former becoming increasingly cheaper relative to Brent, and the latter remaining little affected. Hence, the SPR release served to reduce—in relative terms—US producers’ margins, which are tied mainly to WTI, but with little relief for US motorists.

Longer term, however, future US presidents may find that oil prices matter less and less to their popularity. Each US voter who swaps a gasoline-powered car for an EV is one more who doesn’t care about the gasoline price, and thus has no direct financial stake in the US’ relationship with Saudi Arabia. Electric vehicles, in other words, insulate their owners from political risks in the oil market. 

In the first quarter of 2023, more than 7% of new US cars sold were EVs.? The Biden administration’s goal is for EVs to reach 50% of all vehicle sales by 2030.? 

Over time, the negative correlation between oil prices and presidential popularity may go away. That would free up US foreign policy in ways that render presidents less deferential to the interests of Saudi Arabia and other big oil exporters. 

Ten years from now, if there’s another US-Saudi blowup, will the president feel it necessary to patch things up? Maybe not. Unfortunately for the Biden administration, vehicle fleet turnover is a slow process, with cars lasting 16 years on average.¹? EV penetration is unlikely to bring geopolitical relief for a while.

More false hope?

Americans have heard similar scenarios of foreign policy ‘independence’ before. The shale boom was also supposed to wean Americans off Saudi Arabia. That turned out to be wishful thinking. The shale boom brought plenty of oil to market but didn’t change the fact that crude oil prices that drive US fuel prices are influenced by global drivers. Petroleum supply decisions made outside the US still impose direct effects on the vast majority of US motorists.

The gradual shift toward EVs promises to be more effective in reducing US drivers’ exposure to gasoline, for the simple reason that EVs don’t burn any. Oil isn’t even burned to generate the electricity to charge EVs. Oil-based fuels covered just 0.5% of US power generation in 2021. 

All that said, any US voter migration to EVs won’t actually reduce US oil consumption by much. By 2030, Rystad Energy predicts EV adoption will reduce US demand by about 0.9 million bpd — less than 5% of current US oil consumption. 

So, while individual motorists might be insulated, the overall US economy will still be vulnerable to Saudi pricing decisions. Oil will remain dominant in heavy transport, aviation, shipping and petrochemicals. Higher oil prices will still impact US voters indirectly, through inflation.

Conclusion

The availability of oil and its pricing has been a central facet of Washington’s relationship with Saudi Arabia since the 1930s. The kingdom is the largest exporter and the only producer to maintain meaningful spare oil production capacity that can be quickly brought online to ease prices. As such, the US-Saudi relationship remains a major concern of US presidents, in part since presidential popularity with US voters is closely linked to oil prices overseen in Riyadh.

OPEC’s current price-hawkishness is provoking reactions outside the cartel, where upstream investments should result in new supply. While US shale’s reaction has been subdued, Latin America is seeing a resurgence in investments. Argentina’s shale plays and offshore operations in Guyana and Brazil will benefit from the OPEC+ ‘put option’ on oil.

The final takeaway is that EV adoption by US voters will slowly shift the diplomatic landscape. In fact, EV adoption could have a bigger impact on geopolitics than on oil demand or climate change. The US economy will still use oil, and Saudi Arabia will remain an important exporter with outsized strategic value. But due to a quirk in US electoral politics, the looming importance of oil as an election season bogeyman might diminish. If that happens, look for new frictions between Washington and Riyadh.

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Authors: 


Jim Krane

Jim Krane is the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute. He is the author of Energy Kingdoms: Oil and Political Survival in the Persian Gulf (Colombia University Press 2019).

Claudio Galimberti

Senior Vice President, Head of North America Research
[email protected]

(The data and forecasts contained in this column are Rystad Energy’s and the opinions are of the authors.)