The broad view of the US President Donald Trump’s first administration as exclusively told to OilPrice.com at the time by a senior legal figure in that team was: “We’re not going to put up with any more crap from the Saudis.” That comment came after Saudi Arabia had yet again started another oil price war in early 2020 designed to cripple or destroy U.S. shale producers by dramatically increasing oil production to crash oil prices. It was exactly the same strategy it had used in the 2014-2016 Oil Price War, which had abjectly failed to achieve anything other than destroying the finances of Saudi Arabia and its OPEC brothers, as analysed in my latest book on the new global oil market order. The 2020 Oil Price War ended shortly after Trump himself telephoned Saudi Crown Prince Mohammed bin Salman on 2 April (according to a very senior source in the White House spoken to by OilPrice.com at the time) in which he clearly said that unless OPEC started cutting oil production – so allowing oil prices to rise – that he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from Saudi Arabia. It was also made very clear by Trump that the next time the Saudis tried the same thing it would be the end of the 1945 Agreement between the U.S. and Saudi Arabia that had laid the foundation for their cooperation since that point, as also detailed in full my latest book on the new global oil market order. This, said Trump, would involve the immediate withdrawal of all U.S. military assistance from the Kingdom, without further notice. Following that, Saudi Arabia and OPEC gradually cut oil production to bring prices back up. Nothing in Trump’s fundamental view of Saudi Arabia has changed in his second term as president, according to the same senior legal source. This is why, despite having a US$90.9 per barrel (pb) of Brent crude fiscal breakeven price this year, Saudi Arabia is under no illusions what will happen to it if it attempts to disturb Trump’s fiercely guarded oil price range. And this leaves Aramco having to scrabble around trying to fill the resultant gaping black holes in its finances and that of Saudi Arabia.
The ’Trump Oil Price Range’ is as vital a part of the president’s financial strategy now as it was back when he first took on the job and comprises not just the aggressively-protected floor but an equally staunchly-defended ceiling too. The floor of the range is designed to give a good profit to most U.S. shale producers over and above the US$35 pb of West Texas Intermediate (WTI) point at which well-established sites can breakeven (so, historically around US$40 pb of Brent, based on the longstanding premium there). That was one part of the range that Trump sought to defend in his telephone call to the Saudi Crown Prince in April 2020. On the other side of the range, the ceiling kicks is positioned at around US$70 pb of WTI (about US$75 pb of Brent, given the historical premium). This ties into data showing that a gasoline price of under US$2 per gallon has been most advantageous for U.S. economic growth. This US$2 per gallon level has historically equated to the US$70 pb of WTI price. One reason why this is so important is the close correlation between oil prices and the wider health of the U.S. economy. Historical data highlights that every US$10 pb or so change in the price of crude oil results in around a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion or so per year in consumer spending is lost. The other important reason -- political -- is that since 1896, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven, as fully analysed in my latest book on the new global oil market order. Consequently, it is more than Trump’s job is worth to allow the Saudis to meaningfully push up oil prices, regardless of how much economic pain the Kingdom is in.
Quite aside from the silver bullet option of the withdrawal of U.S. military support from Saudi Arabia, Trump has several other options to ensure that the Kingdom does what is asked of it when it comes to oil prices. An especially effective and targeted option that is being kept in the proverbial bottom drawer of the Oval Office is the ‘No Oil Producing and Exporting Cartels’ (NOPEC) Bill. Trump has ordered this to be made fully ready to be passed into law at minimal notice. The NOPEC Bill would make it illegal to artificially cap oil production or to set prices, as OPEC does under the leadership of the Saudi Arabia. The Bill would also immediately remove the sovereign immunity in U.S. courts for OPEC as a group and for every one of its individual member states. This would leave Saudi Arabia open to being sued under existing U.S. anti-trust legislation, with its total liability being its estimated US$1 trillion of investments in the U.S. alone. The U.S. would then be legally entitled to freeze all Saudi bank accounts in the U.S., seize its assets in the country, and halt all use of U.S. dollars by the Saudis anywhere in the world (oil is denominated in U.S. dollars, of course). It would also allow the U.S. to go after Saudi Aramco and its assets and funds, as it is still a majority state-owned production and trading vehicle. This would mean that Aramco could be ordered to break itself up into smaller, constituent companies that are not deemed to break competition rules in the oil, gas, and petrochemicals sectors or to influence the oil price. Yahtzee!
This leaves Saudi Arabia and its chief money-making enterprise Aramco in a bit of a pickle, which is precisely where Trump wants them. Whether he cares if their hearts and minds will follow is open to debate, but what is not is that he has – to invert the Theodore Roosevelt quote – got them by the balls. The Brent oil price is havering around US$70 pb now – the ‘Trump Oil Price Range’ ceiling, but nearly 30% below Saudi Arabia’s minimum fiscal breakeven price. This already prompted Aramco to drastically cut its quarterly dividend after reporting a 5% year-on-year drop in profit for the first three months of the year. The firm had already announced in March that it expected its dividends for this full year to decline to $85.4bn from $124.3bn in 2024. For a company whose initial public offering relied so heavily on the giant dividends being promised – given that it as regarded as omni-toxic by so many Western investors – this is a massive blow to its market credibility and to its ability to raise finance. One obvious route – of which the U.S is well aware – is to secure such money through big bond offerings, but this will increase the already burgeoning debt profile of the Kingdom. Aramco already sold US$5 billion of bonds in May and signalled that it will want to borrow much more. It will also increase the power of the bondholders to influence decision at Aramco, with a large proportion of these likely to be connected to the U.S., according to the Washington-based legal source. The Saudis may also be aware of this, as the latest talk out of Riyadh is that Aramco instead is looking to sell some of its key power assets and pipelines instead. Although such income is supposedly intended to go to ‘Vision 2030’ that is designed to reduce Saudi Arabia's dependence on oil, some investors fear it will end up in one of the many vanity projects that have characterised this ‘Vision’. The grandiose Neom City idea has already been drastically scaled down from an intended length of 170 kilometres by 2030 to just 2.4 kilometres by that point. However, the new pet project of Crown Prince Mohammed bin Salman is the showpiece FIFA World Cup 2034 soccer event, so that appears a more likely destination for any such funds. A fall-back position for Aramco perhaps would be to ask Cristiano Ronaldo for a loan, following the US$677 million two-year extension with Saudi Arabia’s Al-Nassr soccer team he just signed.
By Simon Watkins for Oilprice.com