Biden’s trip to Saudi Arabia is unlikely to lower oil prices

FILE PHOTO: Gas prices are advertised at a Chevron station as rising inflation and oil costs affect the consumers in Los Angeles, California, U.S., June 13, 2022. REUTERS/Lucy Nicholson/File Photo

U.S. President Joe Biden will go to Saudi Arabia later this week to meet with leaders from the Gulf region. He has articulated his goals for the trip and my colleagues have written several enlightening pieces on its purpose and likely geopolitical outcomes (see here, here, here, and here).

However, when many Americans think about Saudi Arabia, one issue comes to mind — oil. Americans today are extremely frustrated with the high price of gasoline and want the president to bring them lower prices. Many likely believe that the trip is primarily about decreasing prices at the pump, despite the president’s emphasis on other issues. However, those people are likely to be disappointed.

Why are prices so high?

A number of factors are causing today’s high gasoline prices, most notably lower supply of Russian oil and fuel after Russia’s invasion of Ukraine and slow recovery of oil production after the pandemic. Declining refining capacity in the United States is another factor, as some unprofitable refineries have closed and others, especially in California, are converting to biorefineries to take advantage of greater profit margins in the advanced biofuel market. Diesel fuel gets less attention from most consumers, but price rises for diesel have been even steeper than those for gasoline. More than 40% of European cars run on diesel and the United States is supplying more diesel to customers in Europe to make up for declining Russian supply, raising diesel prices in both regions. Since diesel fuels agriculture and transportation of goods, the increasing diesel price is an important driver of inflation.

There are few options in the U.S. presidential toolkit to lower fuel prices in the short term. Biden has been using the ones he has, from the wise move of selling oil from the Strategic Petroleum Reserve to the more economically questionable proposal of a federal gas tax holiday. The ultimate challenge, though, is one of supply and demand. Lowering prices means finding more supply quickly.

Why does the U.S. need foreign oil anyway?

The United States is now the world’s largest oil producer — why would we go to other countries to ask for oil? The answer is that U.S. oil companies do not keep production capacity in reserve. Spare capacity makes no sense for for-profit oil companies like those in the United States. Adding production takes time — from several months for onshore shale oil, to several years for new offshore production. However, the national oil companies of the Gulf States have other motives in addition to profit, and some keep spare capacity for strategic and geopolitical purposes. For decades, during times of high oil prices, U.S. presidents have gone to these producers and asked for more oil. Sometimes the producers have said yes (after Iraq’s invasion of Kuwait in 1990) and other times no (rising prices due to growing Chinese demand in 2008). The answer ultimately depends on the best interests of the oil producers, not the United States.

Why the chance of increasing oil production is slim

If Biden asks for increased oil production during his trip to Saudi Arabia, he is unlikely to be successful. Saudi Arabia and the United Arab Emirates are the only countries with spare capacity today. However, that capacity is believed to be limited and they have no motivation to increase production. Both countries are enjoying today’s high oil prices, particularly in light of a coming energy transition that will eventually erode demand. Crude oil and U.S. fuel prices are already falling a bit, largely based on growing fear of a global recession that would reduce oil demand. The United States and Europe are also pushing to cap the price consumers pay for Russian oil, keeping supply flowing to markets while preventing the Russians from earning a profit. I’m skeptical of this mechanism, but if it works, oil prices are likely to continue falling. In this environment, oil producers feel that the risk is on the downside and that increasing production is a losing strategy.

Additionally, the Organization of Petroleum Exporting Countries (OPEC) and its non-OPEC partners (a group known as OPEC+, which includes Russia) already agreed to increase production quotas this summer. OPEC+ production had been rising by around 400,000 barrels per day (in a global market of roughly 100 million barrels per day) in recent months, and the group agreed to larger increases of nearly 650,000 barrels per day for July and August 2022. It’s unclear if producers could increase oil supply further, even if they wanted to.

Biden has not emphasized energy as a reason for his trip, but given his earlier statements condemning Saudi Arabia and Crown Prince Mohammed bin Salman, the trip could appear to be backtracking or capitulation. He faces the challenge of managing the political fallout from a trip where many Americans have the unrealistic expectation that it will decrease fuel prices. Additionally, Russia is showing no signs of backing away from its war on Ukraine, meaning that the West’s efforts to eliminate Russia’s oil profits aren’t going away either. Leaders will continue efforts to manage the tight oil market, but their toolkit will be limited.