Why Biden Could Come Back From Saudi Arabia Empty-Handed

Authored by Tsvetana Paraskova via OilPrice.com,

• Biden is set to travel to Saudi Arabia this week to plead his case for additional oil output.

• The trip may end in disappointment as Middle East producers have very little capacity to spare.

• A razor-thin global capacity cushion would make supply shocks even more shocking to the market.

As U.S. President Joe Biden travels on his first visit to the Middle East this week, he and his team will make the case for the need for additional oil supply to the market.   The Middle East is just the right place to go when oil supply is concerned. Unfortunately for President Biden and for consumers in America and elsewhere, the biggest oil producers in the Middle East have very little to offer in the short term to alleviate the pain at the pump. Saudi Arabia, the world’s biggest crude oil exporter, may not have the capacity and/or the willingness to tap deeper into capacity despite the continuous calls from major oil-consuming nations.  

The top OPEC producers, all of which are in the Middle East, have some spare oil production capacity left, but the actual numbers are shrouded in mystery, and analysts are only guesstimating how much oil Saudi Arabia and the United Arab Emirates (UAE) could add to the market if they wanted to. 

Middle East Energy Resources Vital For Global Supplies

Since oil prices started rallying at the end of last year, and especially since Russia’s invasion of Ukraine sent oil prices above $100 per barrel earlier this year, President Biden has called several times on OPEC producers to raise production by more than their monthly increases. 

The soaring oil prices and record national average gasoline prices of over $5 per gallon in the United States on some days in June, months before the midterm elections, have prompted President Biden to consider a visit to Saudi Arabia and a meeting with its rulers. Two years ago, he described Saudi Arabia as a “pariah” state and criticized it for its track record of abuses of human rights. 

Days before the visit to the Middle East, President Biden defended his decision to make the trip in an op-ed published in The Washington Post on Saturday. 

“Today, Saudi Arabia has helped to restore unity among the six countries of Gulf Cooperation Council, has fully supported the truce in Yemen, and is now working with my experts to help stabilize oil markets with other OPEC producers,” President Biden wrote.   

“A more secure and integrated Middle East benefits Americans in many ways. Its waterways are essential to global trade and the supply chains we rely on. Its energy resources are vital for mitigating the impact on global supplies of Russia’s war in Ukraine,” he added.  

The President and his team will make the case for higher OPEC oil production during meetings with leaders from the Gulf states in Saudi Arabia, White House National Security Advisor Jake Sullivan said this week. 

“We will convey our general view…that we believe that there needs to be adequate supply in the global market to protect the global economy and to protect the American consumer at the pump,” Sullivan said.

According to the White House, OPEC has the capacity to take “further steps” to boost oil production, Sullivan added. 

Not Much Spare Capacity Left 

According to analysts, the Saudis and the UAE would rather stick to their guns and keep aside what little spare capacity they have left. 

“Saudi Arabia and OPEC+ have very limited spare capacity, and they have to manage it carefully,” Ben Cahill, senior fellow at the Center for Strategic and International Studies, told Bloomberg. 

Per the OPEC+ deal, the Saudi oil production target is at 11.004 million bpd for August. The Kingdom has rarely reached this level, and not for a sustained period of time. So, it’s not certain that the Saudis have the ability to pump 11 million bpd or more on a sustainable basis. It’s even less certain that the Kingdom can quickly tap—if it wanted to—into the 12.2 million bpd production capacity it claims it has.  

Analyst estimates about OPEC’s spare capacity are disparate, too. According to the IEA, the EIA, and OPEC, the spare production capacity is around 3 million barrels per day (bpd). Some analysts, however, believe that the cartel has no more than 1 million bpd of spare capacity available. 

Last month, French President Emmanuel Macron was caught on camera telling President Biden that both the Saudis and the UAE were close to their limits in terms of production. The UAE hastened to explain that the “maximum” production level quote attributed to Sheikh Mohammed bin Zayed al-Nahyan referred to the UAE’s quota in the OPEC+ deal. 

But doubts remain.

Most analysts say that the UAE and Saudi Arabia are unlikely to tap much into their spare capacity regardless of the U.S. push for more oil. A razor-thin global capacity cushion would make supply shocks even more shocking to the market. 

“If President Joe Biden is hoping that his July trip to the Gulf will yield an immediate and significant tranche of extra oil supply from Arab Gulf producers, he will likely be disappointed,” said Bill Farren-Price, a director at Enverus Intelligence Research, commenting on an Enverus report from this week on OPEC’s spare capacity. 

“A more likely outcome is that if talks go well, Riyadh commits to increase supply over the medium term,” Farren-Price noted.