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Biden’s focus in Saudi should be on the long-term

Mid-term election success will tempt the American president to go for quick wins, but he must enter into talks with an eye on the global demand for energy

Will it be all smiles when President Biden poses in front of the cameras with Saudi Crown Prince Mohammed bin Salman? Reuters/Andrej Isakovic
Will it be all smiles when President Biden poses in front of the cameras with Saudi Crown Prince Mohammed bin Salman?

When President Biden visits Saudi Arabia there will be a temptation to focus a dialogue on the immediate problem of high oil prices and the add-on effects to inflation in the US domestic economy. 

There is a great deal of anticipation about an impending ask on Saudi and Emirati oil production. President Biden is of course a politician, one who has an eye on the mid-term elections and a relative short-term view of recent US-Saudi points of tension. 

He also has a knack for the occasional off-the-cuff remark that could easily be interpreted as flippant, especially to a sensitive Saudi leadership.

His animosity towards the Saudi Crown Prince has the potential to create a stand-off in front of the cameras, which will do nothing for oil prices and only undermine the goal of regional security cooperation. 

The opportunity of this visit is to take the long view, especially in energy security.

Biden should focus less on a short-term ask, and more on the potential partnership with the Gulf states in meeting the broader needs of an emerging-market energy transition in Africa, Asia and the Middle East. 

Two million additional barrels a day to oil markets might slightly ease pricing and some trading anxiety over a failure to bring Iran back to market, but it would also point to the extreme limitations within current oil production capacity.

Global spare capacity is now at about two million barrels/day (mbd), so asking Saudi Arabia to shoulder the burden would ultimately create a market even more vulnerable to shocks. 

Asking Saudi Arabia to break with its OPEC+ partners would be politically difficult within the cartel, especially given that most of the OPEC+ members are not meeting their production targets.

Exhausting global spare capacity would create a tight oil market where there is really nothing else to give, a situation that could lead to extreme price hikes if we had an outage caused by weather, terror attacks or political crisis in any number of producers. 

Saudi Arabia and the US have some shared challenges as a result of the Russian invasion of Ukraine.

As the US is weighing its options on how to deal with Russia and the impact of sanctions on oil exports to Europe and the US, the Saudis are calculating how to compete with Russia underselling its product to shared customers in India and China.  

Russian oil seems to be more successfully getting to market. Russian supply fell from over 11 mbd in March to 10 mbd in April following its invasion of Ukraine, but it has recently recovered to well above 10.5 mbd.

Imports into China and India have surged by around 0.5 mbd and 0.8 mbd respectively according to HSBC analysts, offsetting much of the withdrawal of other Western buyers. 

The big questions are: How long will Russian oil be sanctioned, either as Western resolve weakens over Ukraine or the conflict ends? How will insurers respond and be willing to protect seaborne deliveries? And how many Russian ghost barrels will continue to get to market in China and India, or as refined products re-exported around the world, in the way that Russian oil exported to Egypt is now re-emerging as fuel for power plants in Saudi Arabia?

Right now, with OPEC+ easing its cuts, and still quite a lot of Russian oil getting to market, there is a move closer to “balance”, given expectations of a global recession and declining demand through 2023. 

That doesn’t mean oil prices collapse, it just means they might be closer to $100 or under a barrel in 2023.

We are in a tight market and will be for some time as oil demand globally is exceeding or very close to available supplies.

And while we don’t know what global demand may look like in a possible deep global recession, we do know that energy demand for the coming decade is accelerating, especially in emerging markets. 

Taking a long-term view is not the same as tabling points of disagreement on human rights or the war in Yemen.

A long-term view is an understanding that Saudi Arabia and the UAE possess the ability and interest to secure energy supply for a large swathe of growing economies from the Horn of Africa to South Asia. 

For certain, they will sell it and not give it away. And it won’t be just oil. It will be in LNG, in hydrogen and in renewable electricity distribution through building solar and renewable power plants and networks.

The UAE’s Masdar is constructing a floating solar power plant in Indonesia capable of exporting electricity to Singapore.

Saudi PIF partially-owned ACWA power has a large wind farm in Uzbekistan, while Masdar is also building solar, wind and hydrogen projects in Azerbaijan. 

Earlier efforts by the UAE in Jordan on wind and solar have been proof of concept, now expanding by the Abraham Accords with Israel.

Both the UAE and Saudi Arabia have ambitious plans to dominate the green hydrogen market as a transport fuel.

The big picture is that it will take a lot of money, technology and willingness to partner, co-finance and guarantee the necessary infrastructure for – preferably clean – energy demand across developing economies. 

Their access to clean energy means a more stable and prosperous global economy. That is in America’s strategic interests far beyond the price of gasoline in the mid-term elections. 

Karen E Young is director of the Program on Economics and Energy at the Middle East Institute in Washington DC


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