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Speaker 1: From Bloomberg News and iHeartRadio. It's the big take. I'm

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Speaker 1: Westksova today. The growing rift between the US and Saudi

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Speaker 1: Arabia threatens to drive up oil prices and the risk

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Speaker 1: of a recession. Saudi Arabia is the biggest producer in

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Speaker 1: the twenty three nation OPEK plus oil cartel. Despite repeated

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Speaker 1: US requests to keep oil production high, the Saudis and

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Speaker 1: the cartel have instead moved to cut it back, which

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Speaker 1: of course means more expensive gasoline, among other things. But

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Speaker 1: why are they doing that. There's a lot at work here,

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Speaker 1: so I'm calling in reinforcements. National Security editor Nick wadhams.

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Speaker 2: It feels from Washington like you're seeing a complete breakdown

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Speaker 2: in this relationship that has been of such strategic importance

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Speaker 2: for both sides.

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Speaker 1: Bloomberg's chief Emerging Markets economist Zia Daoud, who's recently written

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Speaker 1: about the potential economic consequences of US Saudi tensions if you.

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Speaker 3: Look at what analys are expecting there, expecting oil prices

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Speaker 3: to be above eighty dollars per barrel over the coming years.

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Speaker 1: And Bloomberg's chief economist Tom Orlek.

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Speaker 4: It's not too hard to imagine a production cut ahead

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Speaker 4: of the twenty twenty four presidential election, pushing up prices

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Speaker 4: at the pump, hurting the chances of Joe Biden or

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Speaker 4: whoever else is running.

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Speaker 1: See out in your story. You're right that the price

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Speaker 1: of oil, the world's most valuable commodity, is now being

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Speaker 1: set by a country that the US can no longer

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Speaker 1: call a friend. What did you mean by that.

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Speaker 3: Well, for a long time, the US and allies in

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Speaker 3: the West had allies and support within OPEC. So when

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Speaker 3: the market is tied, they relied on these allies within

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Speaker 3: OPEK to increase production and tame all prices. That was

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Speaker 3: the case in Iran in the sixties and seventies. But

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Speaker 3: then Saudi Arabia became the dominant friend in Alli of

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Speaker 3: the US. There was sort of a pact between Saudi

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Speaker 3: and the US where Saudi secured energy supply and make

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Speaker 3: sure the energy supplies to the US are ongoing, and

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Speaker 3: if there's any trouble they could jump in and add

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Speaker 3: more supply to tame all prices, and in return, the

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Speaker 3: US secured Saudi Arabia against external threats. What we're seeing

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Speaker 3: right now over the last couple of years is that

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Speaker 3: this pact is coming under threat and is fracturing, and

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Speaker 3: that has an impact on the oil market as well

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Speaker 3: as the global economy.

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Speaker 4: So let's not pretend that oil prices have been super

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Speaker 4: stable over the last decade. Right, We've had periods of

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Speaker 4: really high prices after Russia invaded Ukraine, for example. We've

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Speaker 4: had periods of pretty low prices when there were deep

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Speaker 4: concerns about global growth. Even so, that kind of uneasy

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Speaker 4: friendship that packed between the big oil consumers and the

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Speaker 4: big oil producers was a force for things being more

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Speaker 4: stable than they would otherwise have been. And now the

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Speaker 4: risk is that that's taken away. Now if oil prices

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Speaker 4: are going to be set based on the interests of

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Speaker 4: the producers, basically that's going to mean that they're higher.

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Speaker 4: Side wants to pay for its ambitious plans to build

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Speaker 4: futuristic cities in the desert, they need oil prices north

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Speaker 4: of eighty dollars a barrel. If Russia wants to balance

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Speaker 4: its books as it pays for its enormous war of

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Speaker 4: aggression in Ukraine, it needs oil prices one hundred dollars

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Speaker 4: a barrel or higher. And those higher oil prices they

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Speaker 4: stuff the coffers of the oil producers. But for the

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Speaker 4: oil consumers, US households, European households, US businesses, European businesses,

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Speaker 4: they mean higher prices and that means higher inflation. For

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Speaker 4: the European Central Bank and the Federal Reserve, that means

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Speaker 4: the need for more rate hikes, and for the European

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Speaker 4: economy and the US economy, it means more risk of recession.

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Speaker 1: Is the OPEC made a big announcement and April second,

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Speaker 1: can you describe what that is and where the fallout

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Speaker 1: is being.

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Speaker 3: The decision was to cut oil output. The headline numbers

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Speaker 3: are north of one million bells per day and just

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Speaker 3: for context, Well roughly consumes about one hundred million bells

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Speaker 3: a day, so that's basically a cut of one percent

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Speaker 3: of global supply. The surprising bit is the actual decision

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Speaker 3: as well as the numbers. But the actual decision was

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Speaker 3: a big surprise because until maybe February, the Saudis were

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Speaker 3: hinting that the production costs they implemented in the past

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Speaker 3: were going to continue, which is why the decision surprise

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Speaker 3: markets when it happened. Now, the other thing that is

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Speaker 3: important here is that this is the second time the

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Speaker 3: oppec plus cuts oil output since President Joe Biden went

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Speaker 3: to Saudi Arabia last July asking specifically for more supply.

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Speaker 5: I'm doing all I can to increase the supply for

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Speaker 5: the United States of America, which I expect to happen.

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Speaker 5: The Saudi shared that urgency, and based on our discussions today,

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Speaker 5: I expect we'll see further steps in the coming weeks.

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Speaker 3: So he went last year to Saudi asking for more supply,

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Speaker 3: and twice opek plus delivered the opposite of that, and

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Speaker 3: that is an indication of where geopolitics is playing out

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Speaker 3: of financial markets, energy markets, and the global economy.

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Speaker 2: And I would just add, you know one thing on

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Speaker 2: that zied that I found so fascinating, especially with the

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Speaker 2: cuts last year. I mean, it wasn't only that that

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Speaker 2: was a surprise to the US. It was that the

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Speaker 2: US actually thought they had reassurances from Saudi Arabia that

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Speaker 2: it would not cut supplies. So not only is Saudi

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Speaker 2: Arabia surprising the United States with some of these cuts,

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Speaker 2: but it's actually doing the opposite of what US officials

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Speaker 2: say it promised to do. So it feels from Washington

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Speaker 2: in a lot of ways, like you're seeing a complete

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Speaker 2: breakdown in this relationship that has been of such strategic

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Speaker 2: importance for both sides.

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Speaker 3: And speaking of surprises, can I add another surprise that

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Speaker 3: Saudi delivered to the US in the last month, and

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Speaker 3: it wasn't economic, it was geopolitical. So Saudi decided to

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Speaker 3: ease tensions with Iran, and that was surprising by itself.

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Speaker 3: But the biggest surprise was that the deal to restore

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Speaker 3: diplomatic relationship between the two countries was actually broken by

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Speaker 3: China and signed in Beijing.

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Speaker 1: The USOFAR has not responded with alarm, but Washington is

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Speaker 1: not happy about this, clearly, right.

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Speaker 2: I think the US response this time was quite instructive

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Speaker 2: because the last time that OPEC cut production last year

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Speaker 2: before the midterms, the US went very strongly in its

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Speaker 2: public response, and there was some criticism internally that it

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Speaker 2: made the Biden administration look petulant and weak and whining

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Speaker 2: a little bit about how this country that the administration

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Speaker 2: had promised not to cut production in fact went ahead

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Speaker 2: and did so. So you're really seeing a much more

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Speaker 2: understated response here. But you know, behind the scenes, this

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Speaker 2: is still very much a live debate in a lot

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Speaker 2: of ways. Saudi Arabia represents the real schizophrenia when it

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Speaker 2: comes to US policy. So this issue of interests versus values,

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Speaker 2: there's so much talk, particularly under Joe Biden, that he

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Speaker 2: wanted his foreign policy to be built around values, democracy,

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Speaker 2: human rights, things like that versus interests. So who are

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Speaker 2: important strategic partners to help counterbalance against adversaries in the

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Speaker 2: region like Iran? And he's never really been able to

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Speaker 2: find that balance. It's properly you know, when President Biden

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Speaker 2: comes into office and calls Saudi Arabia's crown prints essentially

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Speaker 2: a pariah and ices him out, and.

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Speaker 5: I would make it very clear, make them in fact

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Speaker 5: the pariah that they are.

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Speaker 2: It creates a great deal of animosity and uncertainty about

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Speaker 2: the constancy of that security partnership. So then when Saudi Arabia,

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Speaker 2: as it looks like, is now responding and taking actions

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Speaker 2: based on its own interests, you've really seen the US

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Speaker 2: scramble to respond, and it just doesn't feel like they've

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Speaker 2: been able to settle on a strategy to deal with

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Speaker 2: Saudi Arabia that would reconcile those two aims that the

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Speaker 2: Biden administration has.

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Speaker 1: How did we get here? Because for many years. This

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Speaker 1: relationship was very productive for both sides, even if both

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Speaker 1: countries had different political systems and different larger aims.

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Speaker 2: Yeah, I mean, there's this famous photograph if President of

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Speaker 2: Franklin Roosevelt with King Saud in February of nineteen forty five,

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Speaker 2: as World War Two is winding down, the United States

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Speaker 2: basically makes clear that Saudi Arabia is going to be

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Speaker 2: the central strategic partner in a very volatile region for

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Speaker 2: the decades to come. And you know, there have been

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Speaker 2: certainly a lot of ups and downs over the years,

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Speaker 2: but the First Gulf War, Saudi Arabia served as a

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Speaker 2: basing point for US troops, and then relations took a

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Speaker 2: real downturn after the September eleventh attacks when it was

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Speaker 2: revealed that some of the attackers were Saudi's. But the

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Speaker 2: hit that really put us where we are today was

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Speaker 2: the killing of the Washington Post columnist, Saudi dissident Jamal

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Speaker 2: ka Shoji, and he was killed at the Saudi consulate

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Speaker 2: in Istanbul, and that really provoked a new round of

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Speaker 2: soul searching by Washington, and even the Trump administration that

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Speaker 2: had very friendly ties with the Saudi's found itself essentially

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Speaker 2: backed into a corner where they couldn't not come out

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Speaker 2: and condemn Saudi Arabia, especially given that it looked like

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Speaker 2: the knowledge and potentially ordering of Kashoji's killing went all

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Speaker 2: the way to the top. So everything we've seen in

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Speaker 2: the time since has been overshadowed by Kashoji's killing. And

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Speaker 2: the administration came out very strongly against the Crown Prince

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Speaker 2: after President Biden came into office, but then realized, you know,

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Speaker 2: maybe they had gone too far and they would need

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Speaker 2: to wind that back a little bit because of the

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Speaker 2: threat posed by Iran and so many other issues, and

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Speaker 2: the fact that they still need it. Turns out, as

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Speaker 2: we've been talking about, they still need Saudi Arabia so

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Speaker 2: much to help keep oil prices down and to serve

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Speaker 2: as a counterweight to Iran. So again we're in a

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Speaker 2: position where the Biden administration really has struggled to figure

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Speaker 2: out its policy towards Saudi Arabia, but is growing increasingly

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Speaker 2: unnerved now that it looks like Saudi Arabia's Okay, we

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Speaker 2: can't rely on the US, We're going to turn to

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Speaker 2: other countries like China.

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Speaker 3: I think the Saudi perspective on security is actually interesting

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Speaker 3: because it's easy to focus on the relationship right now

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Speaker 3: between the Saudi Crown Prince Mohammed bin Salman, who's the

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Speaker 3: grandson of Cadelasizasotos in that photo that Nick was talking about,

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Speaker 3: and President Joe Biden in the US. But there is

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Speaker 3: a bit of history to this as well. You know,

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Speaker 3: if you go a bit further back in time, twenty nineteen,

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Speaker 3: there was an attack on Saudi All facilities that took

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Speaker 3: half of Saudi All production off the market in an instant.

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Speaker 6: I want you to imagine here that eighteen drones, a

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Speaker 6: swarm of drones came in just about a week ago

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Speaker 6: in the early hours of the morning of four am

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Speaker 6: and hit precise targets like the one behind me.

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Speaker 3: Trump was president back then, and Trump was really friendly

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Speaker 3: to Saudi. Yet nothing happened, you know, to protect Saudi

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Speaker 3: from these attacks or to basically punish whoever did it

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Speaker 3: back then. If you go even further back in time,

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Speaker 3: Saudi Arabia was semi openly disappointed with the Obama administration

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Speaker 3: because it perceeded to have supported the Arab Spring, the

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Speaker 3: Arab protests in twenty eleven, which led to the toppling

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Speaker 3: of some regimes that Saudi Arabia was friendly to. And

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Speaker 3: it's also if you go up further back in time

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Speaker 3: when Obama came to presidency and there was this pivot

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Speaker 3: to Asia, and I think Saudi Arabia and other countries

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Speaker 3: in the Gulf felt that the US was was withdrawing

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Speaker 3: from the region and that exposed them from a security perspective.

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Speaker 3: So in some sense, the Share Revolution, which hedged the

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Speaker 3: US partially economically from rising all prices, may be also

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Speaker 3: led to some disinterest in the region where Saudi Arabia

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Speaker 3: is in, and that led it to look for other

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Speaker 3: options for security guarantees.

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Speaker 1: After the break could oil producers plan and October Surprise

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Speaker 1: in the twenty twenty four elections to help Joe Biden's

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Speaker 1: opponent The Idea and Nick both mentioned this iconic photograph

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Speaker 1: of President Roosevelt and the King of Saudi Arabia back

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Speaker 1: in nineteen forty five, and that's when the US and

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Speaker 1: Saudi Arabia signed this Oil for Security Pact, which formed

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Speaker 1: the basis of the relationship between the two nations for decades.

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Speaker 1: Can you explain what that was and how it's evolved.

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Speaker 3: Well, I think that the pack goes further back in

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Speaker 3: term to the discovery of oil in Saudi Arabia and

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Speaker 3: then American companies actually went there to extract the oil.

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Speaker 3: The terms of the pact are really simple. Saudi Arabia

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Speaker 3: was a big oil producer. It is the largest exporter

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Speaker 3: of oil in the world. The US has the largest

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Speaker 3: economy in the world and has huge energy needs, and

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Speaker 3: the pact was simple. We exchange the access to energy

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Speaker 3: and oil that is in the region in the Gulf

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Speaker 3: in return for guaranteeing Saudi's security, because US is not

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Speaker 3: just the largest economy the world is actually the strongest

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Speaker 3: army and has the most vast weaponry, et cetera. And

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Speaker 3: that pact has been in place for decades, with some

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Speaker 3: hiccups along the way, but it's probably right now. It's

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Speaker 3: facing it's most testing times. If I have to say that.

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Speaker 1: What does that mean for oil prices and its effects

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Speaker 1: on the world economy, I think.

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Speaker 4: There's a few pieces to it. Whereas so, firstly, if

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Speaker 4: we think about the US side, we've got that conflict

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Speaker 4: between values and interests which Nick spoke about, and certainly

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Speaker 4: the Saudis do not like being vocally condemned as human

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Speaker 4: rights violators. We've got the US shale revolution, which is

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Speaker 4: given the US a source of energy independent from Saudi

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Speaker 4: Arabia and Russia and the Middle East and reduced that dependency.

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Speaker 4: And we have the looming transition from climate change and

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Speaker 4: the aspiration to move towards a net zero economy, and

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Speaker 4: all of these things have convinced Saudi that the US

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Speaker 4: is not the reliable partner that they hoped they would be.

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Speaker 4: Now at the same time as this is happening, the

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Speaker 4: US is weight in the global economy, and so the

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Speaker 4: US's importance to Saudi as a driver of oil demand

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Speaker 4: is still there, but it's not what it was. Big

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Speaker 4: emerging markets China India are rising up the global GDP rankings.

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Speaker 4: That means their demand for oil is rising as well.

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Speaker 4: And at least on China's side, their economic rise is

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Speaker 4: being matched by a rise to play a larger role

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Speaker 4: in global affairs. That's why we've got Shijinping playing the

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Speaker 4: blessed of the peacemaker's role bringing Saudi Arabia and Iran together.

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Speaker 4: That's why we've got China aspiring not just to buy

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Speaker 4: oil from Saudi Arabia, but also potentially in the future

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Speaker 4: to buy that oil in Chinese yuan rather than in

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Speaker 4: US dollars.

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Speaker 6: Zee.

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Speaker 1: I'd given all of the tensions that we've been talking

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Speaker 1: about today, where are oil prices heading? Because it doesn't

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Speaker 1: exactly look great.

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Speaker 3: Well if you look at what analysts are expecting, they're

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Speaker 3: expecting all prices to be above eighty dollars per barrel

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Speaker 3: over the coming years. And I think what is driving

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Speaker 3: this projection is three things. First is the economics. We've

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Speaker 3: talked about how OPEC plus members like Russia, like Saudi Arabia,

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Speaker 3: like Iraq have large spending needs and they need higher

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Speaker 3: oil prices to cover them. The second factor is politics,

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Speaker 3: and we've talked a bit about the fracturing Saudi US

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Speaker 3: relationship and how Saudi Arabia is willing to upset the

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Speaker 3: US with the production cut if its funds is on

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Speaker 3: spending needs. And the third factor is shale oil. So

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Speaker 3: shale oil used to provide a sort of a competitor

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Speaker 3: to OPEC plus because when all prices rose, that meant

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Speaker 3: shale became more profitable, and that meant that more supply

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Speaker 3: would come to the market, depressing price. That's no longer

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Speaker 3: the case, because shall is more focused now on delivering

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Speaker 3: profits to their shareholders rather than expanding output. So I

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Speaker 3: think that's the next few years. I think beyond this,

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Speaker 3: we know that with every oil supercycle we get a downturn,

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Speaker 3: and the downturn happens because high profits attract new firms

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Speaker 3: into the market, which increases supply and depresses prices.

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Speaker 4: I mean Zied mentioned at the beginning of this that

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Speaker 4: we've had two surprises from Saudi since Biden took that

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Speaker 4: trip to readd and ask them to increase production. Twice

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Speaker 4: since then, Saudi has led OPEC plus in not production increases,

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Speaker 4: but production cuts. Already bad news for the United States,

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Speaker 4: but let's just briefly explore a scenario where it could

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Speaker 4: be even worse news. Let's throw the calendar forward to

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Speaker 4: the end of twenty twenty four and imagine a scenario

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Speaker 4: where there is an OPEC production cut ahead of the

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Speaker 4: twenty twenty four presidential election. Now, I'm sure Big Take

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Speaker 4: listeners are familiar with the concept of the October surprise,

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Speaker 4: something big that happens which upsets the outlook for a

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Speaker 4: presidential election just before voters go to cast their ballots.

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Speaker 4: In fact, the origin of the October surprise goes all

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Speaker 4: the way back to nineteen eighty where Jimmy Carter was

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Speaker 4: very much hoping that US hostages would be released from

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Speaker 4: Iran before the election and boost his election chances, and

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Speaker 4: in October he was forced to acknowledge that wasn't going

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Speaker 4: to happen, and that was widely seen as one of

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Speaker 4: the factors which caused Carter to lose the election and

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Speaker 4: Reagan to win the election. Now, with Saudi drifting out

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Speaker 4: of the US's orbit of influence and into the orbit

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Speaker 4: of influence of China and Russia, it's not too hard

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Speaker 4: to imagine something similar happening again. A production cut ahead

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Speaker 4: of the twenty twenty four presidential election, pushing up prices

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Speaker 4: at the pump, hurting the chances of incumbent Joe Biden

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Speaker 4: or whoever else is running on the Democrat ticket, and

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Speaker 4: giving the Republican nominee a boost.

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Speaker 1: When we come back. Can the US Saudi relationship be fixed? Nick?

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Speaker 1: As you said earlier, the Biden administration has not quite

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Speaker 1: settled on a stable policy when it comes to Saudi Arabia.

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Speaker 1: What are they doing to try to fix things, to

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Speaker 1: try to bring some stability to that relationship of anything.

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Speaker 2: Well, I think one thing you're seeing is they're trying

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Speaker 2: to take the debate out of the public realms. So

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Speaker 2: that gets to why the administration has been relatively restrained

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Speaker 2: in its response to the latest cuts. The other thing

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Speaker 2: is that the administration is going to really struggle because

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Speaker 2: a lot of what's going to happen with Saudi Arabia

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Speaker 2: is going to be taken or has the potential to

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Speaker 2: be taken, out of their hands because there are some

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Speaker 2: members of Congress, particularly in the Senate, Democratic Senator Chris Murphy,

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Speaker 2: who really want to downgrade the US relationship with Saudi Arabia,

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Speaker 2: and one of the ways he wants to do that

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Speaker 2: is by driving a stake through the heart of this

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Speaker 2: security relationship and really seek to throttle back weapons sales

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Speaker 2: to Saudi Arabia. That's going to pose an existential question

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Speaker 2: for the Saudis because Saudi Arabia's military is basically seventy

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Speaker 2: five percent of its components and military machinery or US made,

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Speaker 2: including its fighter jets and a lot of very very

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Speaker 2: important equipment. So if the United States, because of pressure

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Speaker 2: from Congress, which has to approve these sales, decides that

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Speaker 2: it's going to throttle back that security partnership, that is

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Speaker 2: naturally going to cause the Saudis to look elsewhere. So

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Speaker 2: one of the things I'm really looking at in the

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Speaker 2: next year or so is how much the Biden administration

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Speaker 2: can actually do. They announced last year, before the previous

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Speaker 2: oil cut, a major new weapons sale to send about

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Speaker 2: two billion dollars in Patriot missile batteries and missiles to

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Speaker 2: the Saudis, which is just the sort of air defense

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Speaker 2: material that the Saudis want. But you know, that stuff

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Speaker 2: has to go through Congress. And if Congress starts to

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Speaker 2: say no, we're not going to sell you this stuff

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Speaker 2: that is just right at the heart of this partnership

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Speaker 2: and has been for decades, what does that lead the

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Speaker 2: Saudis to do. There are plenty of countries like China

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Speaker 2: and Russia that will be willing to supply Saudi Arabia

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Speaker 2: with all the weaponry that it wants.

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Speaker 1: Should people be worried, you know, should we start to

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Speaker 1: make decisions anticipating that oil prices are going to become

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Speaker 1: a problem in the foreseeable future.

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Speaker 3: It is hard to predictable processes. It has been well

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Speaker 3: known and predictions usually end up in embarrassing the forecaster.

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Speaker 3: But I think if you look at what the markets

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Speaker 3: are expecting short term, they expect the market to be tight,

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Speaker 3: meaning that supply will fall short of demand. In fact,

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Speaker 3: even Opek thinks that the market will have a short

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Speaker 3: fall of oil towards the end of this year after

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Speaker 3: the cut. And I think if you look at the

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Speaker 3: long term picture, we're going to get into renewables, We're

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Speaker 3: going to get switched from fossil fuel to renewables. I

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Speaker 3: think the key question here is when does the short

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Speaker 3: term end where we have high oil prices and a

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Speaker 3: tight market, and when does the long term begin where

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Speaker 3: we have the switch and the transition away from oil.

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Speaker 3: But I think that's the key question that's facing both

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Speaker 3: consumers and producers oil.

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Speaker 1: The Tom Nick thanks so much for coming on the show.

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Speaker 4: Thanks for having us, Wes, thanks for having us, Thank.

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Speaker 1: You, thanks for listening to us Here at the Big Take.

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