Trump Looks to Saudi Oil for Help

Don’t look now, but gas prices are climbing.

In the great game that is the international oil industry, you can’t tell the players without a scorecard. There is Iran (the world’s largest state sponsor of terror), its mullahs joined with Russia (international dispenser of exotic poisons), in an alliance to preserve the murderous Assad regime in Syria. Then there is Saudi Arabia (sworn enemy of Iran) with advanced weaponry provided by Iran’s ally, Russia. Both Iran and its Saudi enemy meet regularly, if not congenially, at the gatherings of the 15-member OPEC oil cartel-of which Russia is a fellow-travelling collaborator.

Oh yes, and America is in the mix, in three ways.

First, President (and tweeter-in-chief) Donald Trump, has decided to impose a sanctions regime on Iran so strict that most companies and countries doing business with Iran fear being caught in its wake and are ending business ties with the Islamic Republic.

Second, U.S. oil production is so great, due to the success of the fracking technology that allows the industry to wring oil from shale rock, that it is no longer a passive consumer of oil, waiting to see what burdens OPEC and others decide to impose on it.

Third, America’s president believes he can huff and puff and blow OPEC’s price-inflating restrictions on production down.

Which he is trying to do to avoid a spike in gasoline prices right before the November congressional elections. A spike that voters might blame on the president’s policy of barring Iranian crude from world markets. “We protect the countries of the Middle East, they would not be safe [from Iran] for very long without us, and yet they continue to push for higher and higher oil prices! The OPEC monopoly must get price down now . . . [and] stop ripping off the rest of the world. . . . I don’t like it.”

That threat concerns the oil producers less than the possibility of a collapse in oil prices if they open their spigots, as Trump is demanding. Still shell-shocked from the last period of wide-open production that took prices down from $100 per barrel to $35, producers fear that the economic slow-down they expect early in 2019 will reduce demand for crude. That, they reckon, could more than offset the reduced flow of oil from Iran, and cause prices to drop below their targets of about $70 for the U.S. benchmark crude and $80 for Brent crude, the global benchmark.

So the Saudis, as always walking the fine line between keeping oil prices up and antagonizing Trump, are expanding output a bit (by 500,000 barrels per day), and the Russians, desperate for cash, have added 250,000 bd to service customers it is swiping from its ally, Iran.

But that is not nearly enough to make up for the more-than 1.6 million barrel per day (mbd) drop anticipated in Iran’s exports. Trump will not be happy. Crude oil prices now top $73 and $83 for the benchmark crudes, comfortably-for the cartel if not for Trump-above OPEC’s targets. Worse still for the president, gasoline prices, at about $2.88 per gallon, are already 10 percent above year-ago levels, and will likely soon pierce what might prove to be the politically troubling $3 level, a national average which includes prices significantly higher in eleven states.

Trump was counting on the word of Saudi Arabia’s Prince Mohammed bin Salman, who reportedly personally promised him that the Kingdom would step up production if prices got out of hand-a promise Saudi oil minister Khalid al-Falih prudently repeated at the gathering of the cartelists earlier this week. (The alternative being an extended visit to a state facility that might not be a 5-star hotel.)

Small problem: Most informed observers do not believe that the Saudis have enough spare capacity to increase their output from its current level of 10.4 mbd to the promised 12 mbd.

So this was not the best of weeks for Trump. He has not stricken enough fear into the hearts of oil producers who depend on his protection to get them to ease pressures on prices. He still has not gotten his nominee for the Supreme Court confirmed, and will not by the time the new term begins on October 1-if he is confirmed at all. The final annoyance for Trump: being forced to listen to derisive laughter when he told a U.N. gathering that he has accomplished more in two years than almost any American president-take that George Washington, Abraham Lincoln, Franklin Roosevelt, Ronald Reagan, and a host of other former presidents whose accomplishments seem to have been omitted from the history texts over which Trump pored while preparing his speech.

The president can take some comfort from the devastating effect the threat of sanctions is having on the already shambolic Iranian economy, brought to the brink of collapse by corruption, mismanagement, and the siphoning off of resources to fund terrorism around the world and a nuclear program that Israeli President Benyamin Netanyahu told the U.N. this week goes well beyond the one it has reported.

And secondary sanctions will be applied, absent waivers, to any country or company doing business with Iran, and include denial of access to the world financial system. Which has caused a stampede of companies from Iran, including France’s energy giant Total, which is walking away from a $4.8 billion contract to develop Iran’s south Pars natural gas field, the world’s largest, despite pressure from the E.U. not to do so.

Total CEO Patrick Popyanne says that if he continues doing business with Iran, “The U.S. could decide that I could not have any access to U.S. financing. It is impossible . . . to run an international company . . . without having access to U.S. financing or to U.S. shareholding.”

Then there is India, Iran’s second biggest market for its oil after China . Reliance Industries, that country’s leading refiner, will soon stop buying Iranian crude. And India’s State Bank, the nation’s largest lender, will block any payments refiners seek to make for Iranian crude. There’s more, but you get the idea : secondary sanctions bite hard.

As a result :

● The rial has lost about half its value: early in the year it took only 43,000 rials to buy one U.S. dollar, now it takes more than 100,000 on the open market;

● The youth unemployment rate is around 30 percent;

● Some 40 percent of the jobless are university graduates; and

● The inflation rate is 24.2 percent according to Trading Economics, although the Central Bank of Iran puts it at half that.

But the Trumpkins might hold off before a round of self-congratulation (a holding-off from which the president will surely exempt himself). If the United States and world economies continue to grow, demand for oil will rise. If the Saudis do not have the spare capacity to pump much more oil of the desired quality, and if America’s frackers, hampered by a lack of pipeline capacity in the Permian Basin, cannot bring more crude to market, gasoline price spikes might not be a thing of the past.