The United States has increased pressure on Saudi Arabia to change course in its oil price war with Russia, calling on the kingdom to “rise to the challenge” and start working to stabilize global energy markets.
Mike Pompeo, the US secretary of state, made the remarks before a meeting of G20 leaders on Thursday, marking Washington’s most direct appeal to date in a confrontation that has exacerbated the collapse in oil prices triggered by the global coronavirus pandemic.
The public remarks came after Pompeo met Tuesday with Saudi Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler.
Last week, a senior State Department official said that several oil companies and members of Congress had pressured the Trump administration to intervene. The official said that excess oil production is exacerbating existing challenges as authorities struggle to respond to the pandemic.
“The secretary stressed that as a G20 leader and an important energy leader, Saudi Arabia has a real opportunity to seize the opportunity and reassure the global energy and financial markets when the world faces serious economic uncertainty, “said the State Department in a statement.
Saudi Arabia, one of Washington’s main allies in the Middle East and holder of the G20’s turntable this year, aims to flood the oil market at a time when demand is already collapsing in an attempt to to get a bigger share of the market.
But Prince Mohammed’s policy has come under severe criticism in several capitals for the damage it has caused to oil producers around the world, both in wealthy countries such as the United States who face a credit crunch and increasing job losses and in oil-dependent poor countries such as Iraq, Oman and Nigeria.
The price war helped cut oil prices in half this month to nearly $ 25 a barrel, the lowest level in 17 years.
Saudi Arabia launched the offensive earlier this month after Russia, its partner in the so-called Opec + alliance, refused to join deeper cuts in crude oil production to support prices. In response, the kingdom said it would open the taps to demonstrate its power in the market.
But the decision was made before it became clear how the coronavirus would affect global demand, raising hopes that Saudi Arabia may be convinced to change its position – even if it still disagrees with Russia over how to respond to the crisis.
A Saudi source familiar with the kingdom’s energy policy admitted that the collapse in demand for oil – now estimated at between 10 and 25% of a barrel of $ 100 million a day – had far exceeded their forecasts in early March, before the start generalized blockages and cancellations of flights.
The global oil industry is now faced with the prospect of running out of storage in a few weeks, as the most severe drop in demand in history coincides with increased supplies.
Donald Trump first praised the drop in oil prices, saying it was good for motorists. But the President has since moved on as the decline began to affect energy-producing states such as Texas, North Dakota, and gas-rich Pennsylvania.
A large number of American shale producers are going bankrupt and production is expected to fall sharply in the next 18 months if prices remain low, threatening Trump’s goal of US energy independence and the place of America as the world’s largest producer of oil.
Poor countries dependent on commodity incomes also face a drain on their treasures just as they scramble to find resources to fight the pandemic.
Washington’s public pressure puts Saudi Arabia in a difficult position, faced with a demand from its most important ally at a time when it wants to avoid losing face in its price war with Moscow.
To destabilize the global economy at a time when Riyadh chairs the G20 makes its position particularly uncomfortable, as most of the other G20 leaders are scrambling to prevent the coronavirus crisis from triggering a global depression.
The Saudis are expected to host a virtual gathering of G20 leaders on Thursday to advance what they described as “a coordinated global response to the Covid-19 pandemic and its human and economic implications.”
The Financial Times makes the coverage of major coronaviruses free to read to help everyone stay informed. Find the latest news here.
Ali Shihabi, a Saudi commentator considered close to the leaders, said the kingdom could choose to be more collaborative in the short term.
“Optics will be important to them,” said an Opec official. “They don’t have to be the bad guys. [I’m] I don’t know yet how much oil they can sell due to the destruction of demand anyway. “
But an adviser to Saudi Arabia said the kingdom would “stay the course” in the price war, saying it had no choice. World demand for oil is expected to peak by many analysts in just over a decade, which means that low-cost producers like the kingdom are encouraged to beat their rivals to gain a larger share of the remaining market.
It is not certain that the reduction in supply would significantly change the trajectory of oil prices in the short term, warned traders and analysts. The promised increase in Saudi Arabia’s supply is less than 3% of the world market. The pandemic has caused demand to double-digit.
Additional reporting by Andrew England in London