A renewed effort by Saudi Arabia and Russia to push the price of oil towards $100 a barrel threatens to become another problem for President Joe Biden as he puts his record on the US economy — and thwarting inflation — at the centre of his re-election bid.
Brent crude this week breached $90 a barrel for the first time in 2023 after Riyadh and Moscow extended supply cuts to the end of the year, despite oil having already rallied 25 per cent since June as global demand hits a record high.
The Saudi move to push up oil prices also risks reopening a rift between Saudi Arabia and Washington just as the US pursues a historic deal to normalise relations between Israel and the kingdom, and tries to shore up an alliance against Russia at this weekend’s G20 meeting in India.
“The Saudis don’t have a lot of friends in Washington right now. There’s absolutely the risk that they start to become ‘Exhibit A’ if Washington wants to blame someone for high pump prices or a slowing economy again,” said Raad Alkadiri, an analyst at Eurasia Group in Washington.
The extension of the cuts also comes at a delicate time domestically for the White House, which has highlighted a strengthening economy and slowing inflation as a sign that “Bidenomics” is working.
Pump prices tend to play an outsized role in voter perceptions of the economy, and analysts say a tightening oil market could propel crude to $100 a barrel before the end of the year — pushing fuel costs higher just as inflation begins to ease in western economies.
“The danger for the White House is that rising gasoline prices have the power to reverse the sense that the situation is improving and inflation is coming down,” said Richard Bronze, co-founder of consultancy Energy Aspects.
Any further rise in petrol prices could also complicate the US Federal Reserve’s job as it decides whether it needs to raise interest rates — already at a 22-year high — again this year to cool the economy.
Alan Detmeister, an economist at UBS and former Fed staffer, said he expected to see a “fairly large” increase in the consumer price index for August when the data is released next week because of higher petrol costs. He also expects another uptick in September data, released in October.
Slower price rises in other sectors might help offset energy-fuelled inflation, but he said oil price movements could “easily” return annual US inflation to at least 4 per cent in September, compared with 3.2 per cent now.
The pain is already plain at US petrol stations, where prices have climbed by almost a quarter this year to $3.80 a gallon. That remains below the record high of more than $5 reached last summer — but still 60 per cent above their level when Biden entered office in January 2021.
The fuel price inflation — visible in shining lights along major roads across the country — has provided Biden’s Republican opponents with attack lines ahead of next year’s presidential election. They blame the White House for prioritising climate policy over domestic oil output.
“They’re using the environment to just destroy people. We have liquid gold right under our feet. We were making a fortune. And then he turned that off,” said Donald Trump, the former president and Republican primary frontrunner, in a recent Newsmax interview. “We’re going to drill, baby, drill . . . We’re going to get the energy prices way, way down.”
Last year, when a global energy price crisis raged following Russia’s full-scale invasion of Ukraine, the White House pulled out the stops as petrol prices rose towards and above $4/g, considered a politically sensitive threshold.
Biden implored shale drillers to pump more oil and then authorised record volumes of crude stored in federal emergency stockpiles to be unleashed on the market, helping to tame a sharp oil price rise.
But those levers are less effective now. The once-prolific shale sector is growing slowly these days and the Strategic Petroleum Reserve has been drawn down to its lowest level since 1983. The combination has helped to tighten oil markets as global fuel demand soars, giving Saudi Arabia more sway over prices.
Chris Christie, the former New Jersey governor now running in the Republican primary, suggested that Biden’s cool relationship with Riyadh was to blame for Crown Prince Mohammed bin Salman “making this deal with Russia” to cut more oil supply.
“The crown prince is sending a message to Joe Biden,” Christie said on Fox Business on Wednesday. “‘You won’t have a good relationship with us, well, we’ll have a good relationship with Russia’.”
Energy traders have also questioned why Saudi Arabia has extended its oil cuts given prices have already risen sharply in the past three months.
Opec observers say the kingdom’s position is nuanced, even as speculation swirls about the role Riyadh could potentially play in a tight US election.
The crown prince has targeted a higher oil price to pay for its costly Vision 2030 reform project, which ranges from building the concept city Neom on the Red Sea to buying in superstar footballers such as Cristiano Ronaldo.
“The reality is that the Saudi budget and MBS’s long-term ambitions is going to require oil around $85 or higher,” said Alkadiri. “Projects like Neom don’t get built on $70-a-barrel oil.”
White House efforts to rebuild ties with Riyadh — a reversal from Biden’s campaign-trail promise to make the kingdom a pariah — is a reason for the administration’s tempered response to the cuts announcement this week, say analysts.
That is in stark contrast to last October, when Saudi Arabia first led Opec and its allies in making production cuts, prompting the White House to accuse the cartel of “aligning” with Russia after it invaded Ukraine and induced an energy crisis in Europe.
Jake Sullivan, Biden’s national security adviser, said on Tuesday after Riyadh announced the extra cuts that the White House would continue “regular engagement with the Saudis”.
But he also noted that the “ultimate metric” for judging Biden’s success would be “the price of a gallon of gas for the American consumer”.
Biden could meet MBS at the G20 meeting in New Delhi, though no formal bilateral meeting has been confirmed.
“It seems like they’re playing the long game this time and strategically thinking about the US-Saudi relationship as more than just an energy supply relationship,” said Kevin Book at Clearview Energy Partners in Washington.
“Normalisation [between Israel and Saudi Arabia] seems bigger than pump prices at $90 a barrel, but at $120 you could see a different result.”
Saudi Arabia also hopes to gain leverage in its discussions with the White House, say analysts. The kingdom has a long list of requests, from stronger military support to backing for a civilian nuclear programme.
Promises to intervene if oil prices get too high remain a strong card for Riyadh to wield. Its announcement included a monthly review of the cuts that analysts say could be used as a bargaining chip in negotiations, especially as the election campaign swings into gear.
“Saudi Arabia has leverage, I think, across a number of issues right now,” said Karen Young at Columbia University’s Center on Global Energy Policy. “Having an administration that’s going into an election cycle, they’re holding a lot of cards.”