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Omar Al-Ubaydli: Trump’s Oil Tweet is About Mueller

Trump’s Oil Tweet is About Mueller

by Omar Al-Ubaydli*

What did Donald Trump mean when he said that oil prices are “artificially high”, and what motivated him to make this announcement? In fact, this is an act of self-preservation as Special Counsel Robert Mueller’s investigation continues to look more menacing for the Trump camp.

Let’s start with content of the accusation. OPEC has a reputation for manipulating oil markets in its favor: apparently, by controlling around 40% of the world’s oil production, it oversees coordinated restrictions in its production, thereby realizing higher prices, to the benefit of oil producers.

This sensible perception is actually completely wrong, at least for the period 1980-2009, and most likely up until 2016. Jeff Colgan, a professor at Brown University, has demonstrated in excruciating detail that OPEC’s producers—with the exception of Saudi Arabia—behave identically to OPEC non-members, and that as a consequence, there is no evidence of actual coordinated activity by OPEC.

In fact, if we ignore the media hype, this is expected, since coordinating output cuts between countries that are geographically disparate, have wildly different production costs and fiscal needs, and in a market with volatile demand,is virtually impossible. In fact, coordinated cuts when you only control 40% of the market is commercial suicide, and the advent of shale oil makes it even more unwise.

Notably, Saudi Arabia has historically played a balancing role, by maintaining excess capacity that it brings online in case there is a severe disruption to another OPEC member, such as during the Iraqi invasion of Kuwait in 1990. It does so to shield western countries from price spikes as part of its strategic relationship with the USA.

OPEC’s reputation, therefore, is just smoke and mirrors that plays to the interests of the entire oil community: exportersclaim influence over western economies, and importers have a willing scapegoat for any economic crisis.

In December 2016, something incredibly unexpected occurred, which is that OPEC actually managed to coordinate a cut in output, with the cooperation of a group of non-members, headlined by Russia. The catalyst was geo-politics: Russia saw an opportunity to develop its ties with Saudi Arabia, at a time when shale oil meant that US policymakers no longer needed Saudi Arabia’s assistance in preventing oil price spikes. Russia’s strategic ties with Iran also helped ensure conformity within OPEC that would otherwise have been intra-OPEC geopolitical conflicts. The measures successfully lead to an increase in oil prices, and the accord has been extended until the end of 2018.

Meanwhile, Trump’s election heralded a new, pro-oil stance by the White House. Barrack Obama was more of an environmentalist, preventing the Keystone Pipeline, as well as various internal pipeline projects requested by the shale oil community. As a businessman with little sympathy for environmentalists, Trump wasted no time in boosting the oil sector with approvals for the pipelines.

As an economic nationalist, Trump should favor high oil prices, since it means higher US oil production, more US oil sector jobs, and lower US imports, including US oil imports from the Middle East—a historic reason for US regional military intervention, which Trump is keen to diminish.Moreover, the US economy is booming, with no looming threat from oil prices.

Why, then, would he launch a broadside at OPEC when the organization is helping him achieve his policy goals? The reason is that Mueller’s investigation—which is transforming into a real threat to Trump’s presidency.

For the first year of Trump’s presidency, the command-in-chief was rhetorically quite pro-Russian, personally complimenting Vladimir Putin, and claiming the need for greater cooperation, in spite the hostile stance by democrats, republicans, the state department, and the military establishment toward Russia.

However last month, as the US government began considering military action against the Syrian government, Trump began talking very negatively about Russia, aligning himself with the rest of the key players in American politics.

One of the key reasons for this turnaround, most likely, was the steam gathering in Mueller’s investigation. Trump was initially confident that any investigation of Russian collusion would yield nothing, and that any threat could be eliminated by firing people like former FBI director, James Comey, and, if need be, Mueller.

However, Trump has now surmised that his countermeasures need to be aided by a more overt anti-Russia stance. The declaration by House Leader Paul Ryan that he will give up his seat at the expiration of his term is an indication that republicans fear the worse from the investigation.

Returning to OPEC, Trump has correctly inferred that OPEC’s recent success is driven by Saudi Arabia deepening its geo-strategic ties to Russia, to the benefit of both sides. Therefore, as part of his newfound affinity for anti-Russian rhetoric—and as a way of attacking Russian interests—Trump is attacking OPEC’s accord with Russia. He still wants high prices to boost the US oil sector, and to wean America off Middle Eastern oil imports, but he also wants to improve his anti-Russian credentials, in advance of his showdown with Mueller. This saga is heading toward a gripping conclusion.

Omar Al-Ubaydli
@omareconomics
Researcher at Derasat, Bahrain Center for Strategic, International, & Energy Studies

* The views expressed above are the authors own

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Written by nickbiddlenoe

April 21, 2018 at 5:29 pm

Posted in Uncategorized

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