Speaker 1: From Bloomberg News and iHeartRadio. It's the big take. I'm
Speaker 1: Westksova today. The growing rift between the US and Saudi
Speaker 1: Arabia threatens to drive up oil prices and the risk
Speaker 1: of a recession. Saudi Arabia is the biggest producer in
Speaker 1: the twenty three nation OPEK plus oil cartel. Despite repeated
Speaker 1: US requests to keep oil production high, the Saudis and
Speaker 1: the cartel have instead moved to cut it back, which
Speaker 1: of course means more expensive gasoline, among other things. But
Speaker 1: why are they doing that. There's a lot at work here,
Speaker 1: so I'm calling in reinforcements. National Security editor Nick wadhams.
Speaker 2: It feels from Washington like you're seeing a complete breakdown
Speaker 2: in this relationship that has been of such strategic importance
Speaker 2: for both sides.
Speaker 1: Bloomberg's chief Emerging Markets economist Zia Daoud, who's recently written
Speaker 1: about the potential economic consequences of US Saudi tensions if you.
Speaker 3: Look at what analys are expecting there, expecting oil prices
Speaker 3: to be above eighty dollars per barrel over the coming years.
Speaker 1: And Bloomberg's chief economist Tom Orlek.
Speaker 4: It's not too hard to imagine a production cut ahead
Speaker 4: of the twenty twenty four presidential election, pushing up prices
Speaker 4: at the pump, hurting the chances of Joe Biden or
Speaker 4: whoever else is running.
Speaker 1: See out in your story. You're right that the price
Speaker 1: of oil, the world's most valuable commodity, is now being
Speaker 1: set by a country that the US can no longer
Speaker 1: call a friend. What did you mean by that.
Speaker 3: Well, for a long time, the US and allies in
Speaker 3: the West had allies and support within OPEC. So when
Speaker 3: the market is tied, they relied on these allies within
Speaker 3: OPEK to increase production and tame all prices. That was
Speaker 3: the case in Iran in the sixties and seventies. But
Speaker 3: then Saudi Arabia became the dominant friend in Alli of
Speaker 3: the US. There was sort of a pact between Saudi
Speaker 3: and the US where Saudi secured energy supply and make
Speaker 3: sure the energy supplies to the US are ongoing, and
Speaker 3: if there's any trouble they could jump in and add
Speaker 3: more supply to tame all prices, and in return, the
Speaker 3: US secured Saudi Arabia against external threats. What we're seeing
Speaker 3: right now over the last couple of years is that
Speaker 3: this pact is coming under threat and is fracturing, and
Speaker 3: that has an impact on the oil market as well
Speaker 3: as the global economy.
Speaker 4: So let's not pretend that oil prices have been super
Speaker 4: stable over the last decade. Right, We've had periods of
Speaker 4: really high prices after Russia invaded Ukraine, for example. We've
Speaker 4: had periods of pretty low prices when there were deep
Speaker 4: concerns about global growth. Even so, that kind of uneasy
Speaker 4: friendship that packed between the big oil consumers and the
Speaker 4: big oil producers was a force for things being more
Speaker 4: stable than they would otherwise have been. And now the
Speaker 4: risk is that that's taken away. Now if oil prices
Speaker 4: are going to be set based on the interests of
Speaker 4: the producers, basically that's going to mean that they're higher.
Speaker 4: Side wants to pay for its ambitious plans to build
Speaker 4: futuristic cities in the desert, they need oil prices north
Speaker 4: of eighty dollars a barrel. If Russia wants to balance
Speaker 4: its books as it pays for its enormous war of
Speaker 4: aggression in Ukraine, it needs oil prices one hundred dollars
Speaker 4: a barrel or higher. And those higher oil prices they
Speaker 4: stuff the coffers of the oil producers. But for the
Speaker 4: oil consumers, US households, European households, US businesses, European businesses,
Speaker 4: they mean higher prices and that means higher inflation. For
Speaker 4: the European Central Bank and the Federal Reserve, that means
Speaker 4: the need for more rate hikes, and for the European
Speaker 4: economy and the US economy, it means more risk of recession.
Speaker 1: Is the OPEC made a big announcement and April second,
Speaker 1: can you describe what that is and where the fallout
Speaker 1: is being.
Speaker 3: The decision was to cut oil output. The headline numbers
Speaker 3: are north of one million bells per day and just
Speaker 3: for context, Well roughly consumes about one hundred million bells
Speaker 3: a day, so that's basically a cut of one percent
Speaker 3: of global supply. The surprising bit is the actual decision
Speaker 3: as well as the numbers. But the actual decision was
Speaker 3: a big surprise because until maybe February, the Saudis were
Speaker 3: hinting that the production costs they implemented in the past
Speaker 3: were going to continue, which is why the decision surprise
Speaker 3: markets when it happened. Now, the other thing that is
Speaker 3: important here is that this is the second time the
Speaker 3: oppec plus cuts oil output since President Joe Biden went
Speaker 3: to Saudi Arabia last July asking specifically for more supply.
Speaker 5: I'm doing all I can to increase the supply for
Speaker 5: the United States of America, which I expect to happen.
Speaker 5: The Saudi shared that urgency, and based on our discussions today,
Speaker 5: I expect we'll see further steps in the coming weeks.
Speaker 3: So he went last year to Saudi asking for more supply,
Speaker 3: and twice opek plus delivered the opposite of that, and
Speaker 3: that is an indication of where geopolitics is playing out
Speaker 3: of financial markets, energy markets, and the global economy.
Speaker 2: And I would just add, you know one thing on
Speaker 2: that zied that I found so fascinating, especially with the
Speaker 2: cuts last year. I mean, it wasn't only that that
Speaker 2: was a surprise to the US. It was that the
Speaker 2: US actually thought they had reassurances from Saudi Arabia that
Speaker 2: it would not cut supplies. So not only is Saudi
Speaker 2: Arabia surprising the United States with some of these cuts,
Speaker 2: but it's actually doing the opposite of what US officials
Speaker 2: say it promised to do. So it feels from Washington
Speaker 2: in a lot of ways, like you're seeing a complete
Speaker 2: breakdown in this relationship that has been of such strategic
Speaker 2: importance for both sides.
Speaker 3: And speaking of surprises, can I add another surprise that
Speaker 3: Saudi delivered to the US in the last month, and
Speaker 3: it wasn't economic, it was geopolitical. So Saudi decided to
Speaker 3: ease tensions with Iran, and that was surprising by itself.
Speaker 3: But the biggest surprise was that the deal to restore
Speaker 3: diplomatic relationship between the two countries was actually broken by
Speaker 3: China and signed in Beijing.
Speaker 1: The USOFAR has not responded with alarm, but Washington is
Speaker 1: not happy about this, clearly, right.
Speaker 2: I think the US response this time was quite instructive
Speaker 2: because the last time that OPEC cut production last year
Speaker 2: before the midterms, the US went very strongly in its
Speaker 2: public response, and there was some criticism internally that it
Speaker 2: made the Biden administration look petulant and weak and whining
Speaker 2: a little bit about how this country that the administration
Speaker 2: had promised not to cut production in fact went ahead
Speaker 2: and did so. So you're really seeing a much more
Speaker 2: understated response here. But you know, behind the scenes, this
Speaker 2: is still very much a live debate in a lot
Speaker 2: of ways. Saudi Arabia represents the real schizophrenia when it
Speaker 2: comes to US policy. So this issue of interests versus values,
Speaker 2: there's so much talk, particularly under Joe Biden, that he
Speaker 2: wanted his foreign policy to be built around values, democracy,
Speaker 2: human rights, things like that versus interests. So who are
Speaker 2: important strategic partners to help counterbalance against adversaries in the
Speaker 2: region like Iran? And he's never really been able to
Speaker 2: find that balance. It's properly you know, when President Biden
Speaker 2: comes into office and calls Saudi Arabia's crown prints essentially
Speaker 2: a pariah and ices him out, and.
Speaker 5: I would make it very clear, make them in fact
Speaker 5: the pariah that they are.
Speaker 2: It creates a great deal of animosity and uncertainty about
Speaker 2: the constancy of that security partnership. So then when Saudi Arabia,
Speaker 2: as it looks like, is now responding and taking actions
Speaker 2: based on its own interests, you've really seen the US
Speaker 2: scramble to respond, and it just doesn't feel like they've
Speaker 2: been able to settle on a strategy to deal with
Speaker 2: Saudi Arabia that would reconcile those two aims that the
Speaker 2: Biden administration has.
Speaker 1: How did we get here? Because for many years. This
Speaker 1: relationship was very productive for both sides, even if both
Speaker 1: countries had different political systems and different larger aims.
Speaker 2: Yeah, I mean, there's this famous photograph if President of
Speaker 2: Franklin Roosevelt with King Saud in February of nineteen forty five,
Speaker 2: as World War Two is winding down, the United States
Speaker 2: basically makes clear that Saudi Arabia is going to be
Speaker 2: the central strategic partner in a very volatile region for
Speaker 2: the decades to come. And you know, there have been
Speaker 2: certainly a lot of ups and downs over the years,
Speaker 2: but the First Gulf War, Saudi Arabia served as a
Speaker 2: basing point for US troops, and then relations took a
Speaker 2: real downturn after the September eleventh attacks when it was
Speaker 2: revealed that some of the attackers were Saudi's. But the
Speaker 2: hit that really put us where we are today was
Speaker 2: the killing of the Washington Post columnist, Saudi dissident Jamal
Speaker 2: ka Shoji, and he was killed at the Saudi consulate
Speaker 2: in Istanbul, and that really provoked a new round of
Speaker 2: soul searching by Washington, and even the Trump administration that
Speaker 2: had very friendly ties with the Saudi's found itself essentially
Speaker 2: backed into a corner where they couldn't not come out
Speaker 2: and condemn Saudi Arabia, especially given that it looked like
Speaker 2: the knowledge and potentially ordering of Kashoji's killing went all
Speaker 2: the way to the top. So everything we've seen in
Speaker 2: the time since has been overshadowed by Kashoji's killing. And
Speaker 2: the administration came out very strongly against the Crown Prince
Speaker 2: after President Biden came into office, but then realized, you know,
Speaker 2: maybe they had gone too far and they would need
Speaker 2: to wind that back a little bit because of the
Speaker 2: threat posed by Iran and so many other issues, and
Speaker 2: the fact that they still need it. Turns out, as
Speaker 2: we've been talking about, they still need Saudi Arabia so
Speaker 2: much to help keep oil prices down and to serve
Speaker 2: as a counterweight to Iran. So again we're in a
Speaker 2: position where the Biden administration really has struggled to figure
Speaker 2: out its policy towards Saudi Arabia, but is growing increasingly
Speaker 2: unnerved now that it looks like Saudi Arabia's Okay, we
Speaker 2: can't rely on the US, We're going to turn to
Speaker 2: other countries like China.
Speaker 3: I think the Saudi perspective on security is actually interesting
Speaker 3: because it's easy to focus on the relationship right now
Speaker 3: between the Saudi Crown Prince Mohammed bin Salman, who's the
Speaker 3: grandson of Cadelasizasotos in that photo that Nick was talking about,
Speaker 3: and President Joe Biden in the US. But there is
Speaker 3: a bit of history to this as well. You know,
Speaker 3: if you go a bit further back in time, twenty nineteen,
Speaker 3: there was an attack on Saudi All facilities that took
Speaker 3: half of Saudi All production off the market in an instant.
Speaker 6: I want you to imagine here that eighteen drones, a
Speaker 6: swarm of drones came in just about a week ago
Speaker 6: in the early hours of the morning of four am
Speaker 6: and hit precise targets like the one behind me.
Speaker 3: Trump was president back then, and Trump was really friendly
Speaker 3: to Saudi. Yet nothing happened, you know, to protect Saudi
Speaker 3: from these attacks or to basically punish whoever did it
Speaker 3: back then. If you go even further back in time,
Speaker 3: Saudi Arabia was semi openly disappointed with the Obama administration
Speaker 3: because it perceeded to have supported the Arab Spring, the
Speaker 3: Arab protests in twenty eleven, which led to the toppling
Speaker 3: of some regimes that Saudi Arabia was friendly to. And
Speaker 3: it's also if you go up further back in time
Speaker 3: when Obama came to presidency and there was this pivot
Speaker 3: to Asia, and I think Saudi Arabia and other countries
Speaker 3: in the Gulf felt that the US was was withdrawing
Speaker 3: from the region and that exposed them from a security perspective.
Speaker 3: So in some sense, the Share Revolution, which hedged the
Speaker 3: US partially economically from rising all prices, may be also
Speaker 3: led to some disinterest in the region where Saudi Arabia
Speaker 3: is in, and that led it to look for other
Speaker 3: options for security guarantees.
Speaker 1: After the break could oil producers plan and October Surprise
Speaker 1: in the twenty twenty four elections to help Joe Biden's
Speaker 1: opponent The Idea and Nick both mentioned this iconic photograph
Speaker 1: of President Roosevelt and the King of Saudi Arabia back
Speaker 1: in nineteen forty five, and that's when the US and
Speaker 1: Saudi Arabia signed this Oil for Security Pact, which formed
Speaker 1: the basis of the relationship between the two nations for decades.
Speaker 1: Can you explain what that was and how it's evolved.
Speaker 3: Well, I think that the pack goes further back in
Speaker 3: term to the discovery of oil in Saudi Arabia and
Speaker 3: then American companies actually went there to extract the oil.
Speaker 3: The terms of the pact are really simple. Saudi Arabia
Speaker 3: was a big oil producer. It is the largest exporter
Speaker 3: of oil in the world. The US has the largest
Speaker 3: economy in the world and has huge energy needs, and
Speaker 3: the pact was simple. We exchange the access to energy
Speaker 3: and oil that is in the region in the Gulf
Speaker 3: in return for guaranteeing Saudi's security, because US is not
Speaker 3: just the largest economy the world is actually the strongest
Speaker 3: army and has the most vast weaponry, et cetera. And
Speaker 3: that pact has been in place for decades, with some
Speaker 3: hiccups along the way, but it's probably right now. It's
Speaker 3: facing it's most testing times. If I have to say that.
Speaker 1: What does that mean for oil prices and its effects
Speaker 1: on the world economy, I think.
Speaker 4: There's a few pieces to it. Whereas so, firstly, if
Speaker 4: we think about the US side, we've got that conflict
Speaker 4: between values and interests which Nick spoke about, and certainly
Speaker 4: the Saudis do not like being vocally condemned as human
Speaker 4: rights violators. We've got the US shale revolution, which is
Speaker 4: given the US a source of energy independent from Saudi
Speaker 4: Arabia and Russia and the Middle East and reduced that dependency.
Speaker 4: And we have the looming transition from climate change and
Speaker 4: the aspiration to move towards a net zero economy, and
Speaker 4: all of these things have convinced Saudi that the US
Speaker 4: is not the reliable partner that they hoped they would be.
Speaker 4: Now at the same time as this is happening, the
Speaker 4: US is weight in the global economy, and so the
Speaker 4: US's importance to Saudi as a driver of oil demand
Speaker 4: is still there, but it's not what it was. Big
Speaker 4: emerging markets China India are rising up the global GDP rankings.
Speaker 4: That means their demand for oil is rising as well.
Speaker 4: And at least on China's side, their economic rise is
Speaker 4: being matched by a rise to play a larger role
Speaker 4: in global affairs. That's why we've got Shijinping playing the
Speaker 4: blessed of the peacemaker's role bringing Saudi Arabia and Iran together.
Speaker 4: That's why we've got China aspiring not just to buy
Speaker 4: oil from Saudi Arabia, but also potentially in the future
Speaker 4: to buy that oil in Chinese yuan rather than in
Speaker 4: US dollars.
Speaker 6: Zee.
Speaker 1: I'd given all of the tensions that we've been talking
Speaker 1: about today, where are oil prices heading? Because it doesn't
Speaker 1: exactly look great.
Speaker 3: Well if you look at what analysts are expecting, they're
Speaker 3: expecting all prices to be above eighty dollars per barrel
Speaker 3: over the coming years. And I think what is driving
Speaker 3: this projection is three things. First is the economics. We've
Speaker 3: talked about how OPEC plus members like Russia, like Saudi Arabia,
Speaker 3: like Iraq have large spending needs and they need higher
Speaker 3: oil prices to cover them. The second factor is politics,
Speaker 3: and we've talked a bit about the fracturing Saudi US
Speaker 3: relationship and how Saudi Arabia is willing to upset the
Speaker 3: US with the production cut if its funds is on
Speaker 3: spending needs. And the third factor is shale oil. So
Speaker 3: shale oil used to provide a sort of a competitor
Speaker 3: to OPEC plus because when all prices rose, that meant
Speaker 3: shale became more profitable, and that meant that more supply
Speaker 3: would come to the market, depressing price. That's no longer
Speaker 3: the case, because shall is more focused now on delivering
Speaker 3: profits to their shareholders rather than expanding output. So I
Speaker 3: think that's the next few years. I think beyond this,
Speaker 3: we know that with every oil supercycle we get a downturn,
Speaker 3: and the downturn happens because high profits attract new firms
Speaker 3: into the market, which increases supply and depresses prices.
Speaker 4: I mean Zied mentioned at the beginning of this that
Speaker 4: we've had two surprises from Saudi since Biden took that
Speaker 4: trip to readd and ask them to increase production. Twice
Speaker 4: since then, Saudi has led OPEC plus in not production increases,
Speaker 4: but production cuts. Already bad news for the United States,
Speaker 4: but let's just briefly explore a scenario where it could
Speaker 4: be even worse news. Let's throw the calendar forward to
Speaker 4: the end of twenty twenty four and imagine a scenario
Speaker 4: where there is an OPEC production cut ahead of the
Speaker 4: twenty twenty four presidential election. Now, I'm sure Big Take
Speaker 4: listeners are familiar with the concept of the October surprise,
Speaker 4: something big that happens which upsets the outlook for a
Speaker 4: presidential election just before voters go to cast their ballots.
Speaker 4: In fact, the origin of the October surprise goes all
Speaker 4: the way back to nineteen eighty where Jimmy Carter was
Speaker 4: very much hoping that US hostages would be released from
Speaker 4: Iran before the election and boost his election chances, and
Speaker 4: in October he was forced to acknowledge that wasn't going
Speaker 4: to happen, and that was widely seen as one of
Speaker 4: the factors which caused Carter to lose the election and
Speaker 4: Reagan to win the election. Now, with Saudi drifting out
Speaker 4: of the US's orbit of influence and into the orbit
Speaker 4: of influence of China and Russia, it's not too hard
Speaker 4: to imagine something similar happening again. A production cut ahead
Speaker 4: of the twenty twenty four presidential election, pushing up prices
Speaker 4: at the pump, hurting the chances of incumbent Joe Biden
Speaker 4: or whoever else is running on the Democrat ticket, and
Speaker 4: giving the Republican nominee a boost.
Speaker 1: When we come back. Can the US Saudi relationship be fixed? Nick?
Speaker 1: As you said earlier, the Biden administration has not quite
Speaker 1: settled on a stable policy when it comes to Saudi Arabia.
Speaker 1: What are they doing to try to fix things, to
Speaker 1: try to bring some stability to that relationship of anything.
Speaker 2: Well, I think one thing you're seeing is they're trying
Speaker 2: to take the debate out of the public realms. So
Speaker 2: that gets to why the administration has been relatively restrained
Speaker 2: in its response to the latest cuts. The other thing
Speaker 2: is that the administration is going to really struggle because
Speaker 2: a lot of what's going to happen with Saudi Arabia
Speaker 2: is going to be taken or has the potential to
Speaker 2: be taken, out of their hands because there are some
Speaker 2: members of Congress, particularly in the Senate, Democratic Senator Chris Murphy,
Speaker 2: who really want to downgrade the US relationship with Saudi Arabia,
Speaker 2: and one of the ways he wants to do that
Speaker 2: is by driving a stake through the heart of this
Speaker 2: security relationship and really seek to throttle back weapons sales
Speaker 2: to Saudi Arabia. That's going to pose an existential question
Speaker 2: for the Saudis because Saudi Arabia's military is basically seventy
Speaker 2: five percent of its components and military machinery or US made,
Speaker 2: including its fighter jets and a lot of very very
Speaker 2: important equipment. So if the United States, because of pressure
Speaker 2: from Congress, which has to approve these sales, decides that
Speaker 2: it's going to throttle back that security partnership, that is
Speaker 2: naturally going to cause the Saudis to look elsewhere. So
Speaker 2: one of the things I'm really looking at in the
Speaker 2: next year or so is how much the Biden administration
Speaker 2: can actually do. They announced last year, before the previous
Speaker 2: oil cut, a major new weapons sale to send about
Speaker 2: two billion dollars in Patriot missile batteries and missiles to
Speaker 2: the Saudis, which is just the sort of air defense
Speaker 2: material that the Saudis want. But you know, that stuff
Speaker 2: has to go through Congress. And if Congress starts to
Speaker 2: say no, we're not going to sell you this stuff
Speaker 2: that is just right at the heart of this partnership
Speaker 2: and has been for decades, what does that lead the
Speaker 2: Saudis to do. There are plenty of countries like China
Speaker 2: and Russia that will be willing to supply Saudi Arabia
Speaker 2: with all the weaponry that it wants.
Speaker 1: Should people be worried, you know, should we start to
Speaker 1: make decisions anticipating that oil prices are going to become
Speaker 1: a problem in the foreseeable future.
Speaker 3: It is hard to predictable processes. It has been well
Speaker 3: known and predictions usually end up in embarrassing the forecaster.
Speaker 3: But I think if you look at what the markets
Speaker 3: are expecting short term, they expect the market to be tight,
Speaker 3: meaning that supply will fall short of demand. In fact,
Speaker 3: even Opek thinks that the market will have a short
Speaker 3: fall of oil towards the end of this year after
Speaker 3: the cut. And I think if you look at the
Speaker 3: long term picture, we're going to get into renewables, We're
Speaker 3: going to get switched from fossil fuel to renewables. I
Speaker 3: think the key question here is when does the short
Speaker 3: term end where we have high oil prices and a
Speaker 3: tight market, and when does the long term begin where
Speaker 3: we have the switch and the transition away from oil.
Speaker 3: But I think that's the key question that's facing both
Speaker 3: consumers and producers oil.
Speaker 1: The Tom Nick thanks so much for coming on the show.
Speaker 4: Thanks for having us, Wes, thanks for having us, Thank.
Speaker 1: You, thanks for listening to us Here at the Big Take.
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