(Bloomberg) -- Bewildered Biden administration officials hunkered down Thursday in the wake of a shock oil production cut by Saudi Arabia and its OPEC+ allies, hoping that crude prices don’t spike ahead of November elections and end Democratic control of Congress.
US officials had sought to stave off the move, without success. Little more than three months after President Joe Biden traveled to Saudi Arabia to urge higher oil output for a global economy on the skids, the kingdom and the cartel it dominates said it would slash production by 2 million barrels per day.
Market reaction was muted, as traders had already priced in a cut. That’s bought time for the White House to consider its response.
But while Biden said he’s considering “alternatives,” officials made clear that the rapid developments had outpaced any decision.
Top Biden energy adviser Amos Hochstein said Thursday on Bloomberg Television that after a meeting with Saudi Crown Prince Mohammed bin Salman less than two weeks ago, he did not have the impression that OPEC+ was poised for its most dramatic cut since the beginning of the pandemic.
“I guess a lot can happen in two weeks in the global markets,” Hochstein said.
Furious congressional Democrats urged retaliation against Riyadh, a government seen as an increasingly unreliable ally. Many aired suspicions that the timing of the announcement was intended by the crown prince, whose country Biden once vowed to make a “pariah,” to have maximum impact on the election.
“This production cut is a clear snub to the Biden administration,” said Emma Ashford, a senior fellow at the Stimson Center think-tank in Washington. “Saudi Arabia always does what is best for oil markets and protecting its market share. But it does feel like Biden got rolled -- he effectively dead-lifted MBS to polite international society after the Khashoggi incident and got nothing in return,” she said of the 2018 killing of journalist Jamal Khashoggi by Saudi agents.
Yet Biden and his team have no good options to respond to the OPEC+ move and would see little benefit from an extended dispute highlighting the president’s inability to influence the cartel. Fortunately for them, prices so far haven’t increased as much as the White House expected and analysts project only a modest bump at gasoline pumps.
“The White House hasn’t been shy about its frustration with the OPEC+ decision, but there isn’t much they can do about it,” said Kevin Book, managing director of ClearView Energy Partners, Thursday in an interview.
The administration has already maximized one tactic, selling unprecedented amounts of US crude stockpiles in a bid to re-balance the oil market and lower prices. Other options, none of them likely, include passage of legislation to allow lawsuits against the cartel, a ban on US oil exports or curtailing weapons sales to Saudi Arabia.
The White House has kept a close eye on gasoline prices as a barometer for Democrats’ political prospects, frequently touting a significant reduction since June, when American motorists paid more than $5 a gallon on average.
Biden told reporters he felt “disappointment” after the announcement but did not regret his visit to Saudi Arabia. “We’re looking at what alternatives we may have,” he said.
The administration’s most potent potential weapon is the so-called “NOPEC” bill, legislation that would allow the US to sue OPEC producers under antitrust law for manipulating the energy market.
The measure is broadly popular on Capitol Hill and versions have been pending for years. But it is a geopolitical Pandora’s Box, raising the potential for sweeping, unintended consequences, including even more oil price volatility and diplomatic fallout.
The White House issued a statement Wednesday suggesting Biden might back the legislation, reversing its previous opposition in an apparent effort to send a message to the cartel.
Senate Majority Leader Chuck Schumer Thursday said the Senate was “looking at all the legislative tools to best deal with this appalling and deeply cynical action,” including NOPEC.
A person familiar with the matter, though, told Bloomberg News that there are no plans to bring the measure to the floor, although that could change.
“We will be assessing and consulting closely with Congress around a range of issues on the back end of this,” top Biden economic adviser Brian Deese said Thursday, indicating legislative action would wait until oil price moves settle.
The administration will continue to turn to emergency crude stockpiles as one relief valve. The president still has room to sell more oil from the Strategic Petroleum Reserve, under a historic 180-million-barrel drawdown announced in the spring.
Though the plan was to release about a million barrels per day, “we modulated that as the prices went down,” Hochstein said on MSNBC. “We haven’t actually released that full 180 million barrels yet, so we still have plenty of room to go and to support American families.”
The government has sold 155 million barrels of crude from the reserve since March, with contracts to deliver another 10 million barrels set to be awarded Friday. That allows room to discharge as much as 15 million more barrels under the program.
The White House’s Wednesday statement hinted at further releases, saying that Biden “will continue to direct SPR releases as appropriate to protect American consumers and promote energy security.”
‘Not Paying Attention’
Banning or limiting exports of gasoline and diesel has also gained traction among some administration officials as a means of ensuring lower consumer prices, but industry groups and congressional Republicans say it could backfire by causing prices to rise and disrupting global markets.
The president and top administration officials have spent months imploring oil companies and refiners to produce more fuel. While refineries are maxing out production, an increase in gasoline and diesel exports has drained US fuel inventories.
In New England, storage of diesel and other distillates have dipped 59% below a five-year, seasonally adjusted average -- ahead of winter, when demand for home heating oil climbs.
Industry leaders say Biden’s pleas for more domestic production conflict with administration policies focused on accelerating green energy and stifling fossil fuels.
“Anybody that believes that the administration is looking for more supply in the United States is not paying attention to the policies that they are implementing over and over again,” said Frank Macchiarola, senior vice president of the American Petroleum Institute.
Biden on Thursday left the door open to easing sanctions on Venezuela to allow US companies to resume pumping oil there, but said the country’s government would have to do “a lot” in order for it to happen. Such a move would also risk flaring tensions with Republicans and Democrats in Congress who are staunch critics of Venezuelan President Nicolas Maduro, a socialist who has suppressed opposition to his regime.
Equally unlikely is the prospect of the US cutting off or curbing weapons sales to Saudi Arabia, the administration’s main point of leverage over the kingdom. Riyadh has purchased billions of dollars in US weaponry and has commitments to buy billions more, powering its fight against Iran-backed Houthi rebels in Yemen, while the amount of oil and petroleum products the US imports from the Saudis and their OPEC+ allies has decreased.
Some Democratic lawmakers have proposed ending Saudi weapons sales or pulling troops out of the kingdom and the United Arab Emirates. But Rachel Ziemba, a fellow at the Center for a New American Security, cautioned against taking drastic action.
“We shouldn’t assume that the security partnership means that US and Saudi interests always align,” she said. “We need to be clear-eyed about what partners are needed to meet our national security goals and I don’t think we want to leave a vacuum” in the Middle East.
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