Wael’s view
In June 2008, I sat in a Jeddah Hilton conference room packed with ministers from more than 100 countries waiting for King Abdullah to arrive. Oil was closing in on a record price. Saudi Arabia’s message that day: The world had enough oil. It offered a modest increase in output and told governments to cut taxes and rein in speculators. Less than three weeks later, on July 11, crude hit about $147 a barrel.
This week in Riyadh, another ministerial gathering took place. The man now leading the kingdom’s response, Prince Abdulaziz bin Salman, was an assistant oil minister two decades ago. This time the crisis is different — and so is his answer.
Then, the argument was about speculation. Saudi officials said investors had pushed prices well past what supply and demand justified, and that financial trading in oil had grown many times larger than the physical market. Washington thought OPEC should pump more. Riyadh replied that it would not build capacity for buyers who did not exist. Now the argument is about geography.
Gulf crude is trapped behind the Strait of Hormuz, and the kingdom’s answer is to build around it. Prince Abdulaziz told the World Petroleum Congress that Saudi Arabia may lift its East-West pipeline capacity from about 7 million barrels a day to 10 million within three years, and he wants more international involvement. His logic is that the more countries have a stake in the line, the better it is protected.
Both responses share one feature. Saudi Arabia cannot solve the crisis alone, and it ends up paying for the attempt. In 2008 it built rarely used spare capacity and has carried its cost ever since. A new pipeline will follow the same pattern. When the war ends it will not run full, and Riyadh will keep it as insurance.
The oil market has also shifted. In 2008, OPEC was dominant and no one else could add meaningful supply. Some consumers searched for substitutes, and ethanol was an answer then. Today, it’s the electric vehicle. But neither remedy has removed the need for fossil fuels and no price spike has changed the thirst for oil.
The biggest difference is Washington. In 2008, the US relied on OPEC’s oil. Today, it has plenty of its own, a reality that may not be felt by Americans paying more at the pump. If America needed OPEC barrels as badly as it did in 2008, the politics of this current crisis would look very different.
Geopolitical risk has been the main factor driving $100 oil this year, with shipping and insurance comprising more than a third of the price of the global crude benchmark. Even if Hormuz is opened tomorrow, the new logistics of moving crude will weigh on producers. It will also change the relationship between states: Iraq is planning to build a pipeline through Syria to the Mediterranean, while Kuwait and Qatar may lean on their Gulf neighbors to reach ports outside the strait.
Ultimately, much of the bill will go to the same address: Riyadh. The kingdom has carried the cost of a largely idle pipeline for decades, and will soon have to revert to its role as the global swing producer, keeping prices fair to producers paying for new infrastructure, and consumers who won’t tolerate high prices forever.
Notable
- Saudi Arabia’s oil supply could still be threatened even after the end of the war. This report from the Center for Strategic and International Studies looks at what options there are.
- Despite the oil shock, the Saudi economy can remain resilient, according to this briefing from the Atlantic Council.