The remarks made by Russia and the United States last week regarding the increased dialogue with Saudi Arabia highlighted a new reality. In the current mix of the oil price war, Saudi Arabia has emerged as the most effective player that has extensive influence on which path the contentions will follow. The U.S.’s added pressure on Saudi Arabia by the reiteration of its calls for slashing output has been so far ignored by the Saudi’s, and with the condition the U.S. is in right now considering the COVID-19 outbreak, U.S. has little room to leverage its position.
So long as the outbreak insists on growing at its current rate in the U.S., the U.S. will most likely not be able to mobilize the financial resources to aid its energy sector while following a protectionist path and instead utilize the lowered energy costs for supporting its real economy during the current turbulent times. The rumored intended protective measures can only go so far in being effective for our scenario.
A proposed tariff on imports of Saudi Oil would depend highly on the rate to be applied, given that Saudi’s have almost burned the bridges with their intentions on pushing the U.S. out of the market and could be willing to pay the premium in certain cases. It would be a good time to note that the U.S. has added a significant amount of the excess production glut in the recent years and its consistent pattern of increasing output might have played an important role in sparking the Saudi’s current decisions, especially when you consider that the kingdom relies heavily on its oil exports for funding its budget. In the face of such a spiked tariff, the Saudi’s can isolate the U.S. market from its export locations but flood the export markets of the U.S. to again withdraw the share of U.S. companies from the international oil market.
Other proposed measures by the American senators have so far ranged from trade restrictions all the way over to sanctions and the removal of U.S. forces from the kingdom. While seemingly rough at first sight, such measures would likely not implemented in full scale and remain permanent. The strategic location of the kingdom and the current global supply glut and excess production capacity in numerous goods would likely enable Saudi Arabia to quickly offset and replace the measures that might be implemented against itself. This would hold true for goods that have replacement alternatives and would likely not include high-technology goods/services. The strategic location of Saudi Arabia in the Middle East, with its proximity to multiple straits, gives large leverage for the kingdom as a geopolitical factor that can not be replaced.
Another point to note would be that even if the U.S. does succeed in forcing/convincing Saudi Arabia to decrease its production or call a truce in the current oil war, then it would not change the fact that Saudi Arabia would still remain the worlds largest swing producer and still hold the cards in numerous oil-related matters globally. Security-wise, Iran, which remains as the regional rival of Saudi Arabia, is in no condition to confront Saudi Arabia on a meaningful scale due to its domestic COVID-19 outbreak. Additionally, knowing the current oil price war is hurting the U.S. economy more than a potential disruption in the oil flows out of the straits, Iran would not be pursuing such aggressive behavior, even if it had the chance. So speaking in terms of security in the gulf, the removal of troops does not constitute a valid threat in the short-to-mid term.
Thus, such measures by the United States would not be abruptly implemented and the most logical step the U.S. could follow at the moment would be to extend credit terms with government-backing for its energy companies in the short-term to outlast the COVID-19’s most volatile period as the current erratic movements of the financial markets has forced the retreat of the capital markets from providing credit flow across multiple domains to companies. Following up to that with a combination of incentives for technological developments in the oil&gas supply chain and financial support packages that can range from tax breaks to deferred lease payments could gain invaluable breathing room for its firms as the current oil price war is distressing the economies of all of those involved and can only last for a defined period of time before the domestic budget/trade problems start floating in a major scale.
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