When the Organization of the Petroleum Exporting Countries met in Vienna in December, it was in danger of imploding.
Oil prices had plunged. Member states Iran, Venezuela and Libya were refusing to cut production. Qatar had quit. And U.S. President Donald Trump was pressuring Saudi Arabia to keep prices low.
With negotiations teetering on the brink of failure, rescue came from an unlikely place—Russia, which isn’t even an OPEC member. President Vladimir Putin agreed to cut Russian oil production in league with OPEC, provided that Iran was allowed to keep pumping.
The degree of acrimony that pervaded that critical meeting, and the critical role Russia played in resolving the crisis, hasn’t previously been reported. What happened behind closed doors in December was a pivotal moment in Russia’s transformation from a nation that didn’t cooperate with OPEC at all to one that has become an indispensable partner.
Saudi energy minister Khalid al-Falih recently joked that he talks more with his Russian counterpart Alexander Novak than with some of his colleagues in the Saudi cabinet. “We met 12 times in 2018,” he said of Mr. Novak at a news conference in March.
At the next OPEC meeting, scheduled for May, Russia and Saudi officials will discuss whether to formalize what has been until now an temporary alliance.
For decades, the U.S. has embraced Saudi Arabia as one of its close geopolitical allies, selling it arms and encouraging its role as a stabilizing force in the Middle East. In exchange, Washington has come to expect a stable supply of oil to global markets to help damp price spikes and to prevent harm to the U.S. economy.
With its new ally in Russia, Saudi Arabia is no longer beholden only to Washington.
Under Mr. Trump, the U.S. has altered its longstanding, hands-off approach to the cartel. Mr. Trump has repeatedly tweeted for OPEC to boost output to drive oil prices down, and he has phoned the Saudi government directly asking the kingdom to open the taps.
“The United States-Saudi Arabia relationship plays a critical role in ensuring Middle East stability and maintaining maximum pressure against Iran,” said a senior Trump administration official. “The U.S.-Saudi relationship remains strong.”
The murder of dissident journalist Jamal Khashoggi at the Saudi consulate in Turkey last October created a fresh rift between the Saudi kingdom and the U.S.—and provided an opening for Russia to insert itself further into OPEC.
.. Oil prices had cratered in 2016 and didn’t look likely to rebound. The three men needed to orchestrate a deal to reduce crude output to lift global prices. Russia and OPEC agreed to cut production.
By the middle of last year, crude was soaring again, thanks to lower output from OPEC and Russia and renewed prospects for global economic growth. By the end of the year, however, amid a U.S.-China trade battle, the world’s economic outlook was dimming.
As the December OPEC meeting loomed, oil prices had plunged some 30% in six weeks. The Saudis needed unanimous agreement on proposed production cuts to shore up prices. Iran, already hobbled by U.S. sanctions that began in November, was reluctant to curb its output. Libya and Venezuela, with domestic troubles of their own, also were holdouts.
With the cartel about to meet in Vienna, Qatar, Saudi Arabia’s neighbor in the Persian Gulf, shocked global oil markets by announcing it was leaving OPEC. It was among a small group of member countries that felt overshadowed as the Saudi-Russia alliance grew stronger. OPEC has become “basically all about what [Prince Mohammed] and his buddy Putin want,” says a Qatari official.
In his first week he withdrew from the unratified 12-nation Trans-Pacific Partnership. He prepared to pull out of the U.S.-Korea Free Trade Agreement (Korus) and the North American Free Trade Agreement. Earlier this year he imposed steep tariffs on imports of steel and aluminum, using a little-used national security law, and threatened the same for autos.
Today, Korus and Nafta have been replaced by updated agreements(one not yet ratified) that look much like the originals. South Korea accepted quotas on steel. Mexico and Canada agreed to higher wages, North American content requirements and quotas for autos.
These represent a step back from free trade toward managed trade, but they will have little practical effect: The limits on how many cars Mexico and Canada can ship duty-free to the U.S., for example, exceed current shipments. Mr. Trump hasn’t stopped threatening auto tariffs, but for now his officials have elected instead to seek broader tariff reductions with Japan and the European Union.
.. Meanwhile, the U.S. trade deficit that incenses Mr. Trump has grown during his presidency, especially with China and Mexico, as a strong American economy sucks in imports. His exhortations to manufacturers to bring jobs back to the U.S. have largely fallen on deaf ears.
Just about every material you’d need to remodel a kitchen is now subject to the earlier round of tariffs. Many U.S. vendors import the majority of their materials from China. Flooring, cabinets, countertops, sinks, refrigerators and lighting fixtures are on the list of imports from China that now have a 10% tax, as are many of the materials used to make them, from plywood and quartz to stone and granite.
Sorry, investors, but there is no sanity clause.
Two years ago, after the shock of Donald Trump’s election, financial markets briefly freaked out, then quickly recovered. In effect, they decided that while Trump was manifestly unqualified for the job, temperamentally and intellectually, it wouldn’t matter. He might talk the populist talk, but he’d walk the plutocratic walk. He might be erratic and uninformed, but wiser heads would keep him from doing anything too stupid.
In other words, investors convinced themselves that they had a deal: Trump might sound off, but he wouldn’t really get to make policy. And, hey, taxes on corporations and the wealthy would go down.
But now, just in time for Christmas, people are realizing that there was no such deal — or at any rate, that there wasn’t a sanity clause. (Sorry, couldn’t help myself.) Put an unstable, ignorant, belligerent man in the Oval Office, and he will eventually do crazy things.
To be clear, voters have been aware for some time that government by a bad man is bad government. That’s why Democrats won a historically spectacular majority of the popular vote in the midterms. Even the wealthy, who have been the prime beneficiaries of Trump policies, are unhappy: A CNBC survey finds that millionaires, even Republican millionaires, have turned sharply against the tweeter in chief.
.. The reality that presidential unfitness matters for investors seems to have started setting in only about three weeks (and around 4,000 points on the Dow) ago.
- First came the realization that Trump’s much-hyped deal with China existed only in his imagination. Then came
- his televised meltdown in a meeting with Nancy Pelosi and Chuck Schumer,
- his abrupt pullout from Syria,
- his firing of Jim Mattis and
- his shutdown of the government because Congress won’t cater to his edifice complex and build a pointless wall. And now there’s
- buzz that he wants to fire Jerome Powell, the chairman of the Federal Reserve.
Oh, and along the way we learned that Trump has been engaging in raw obstruction of justice, pressuring his acting attorney general (who is himself a piece of work) over the Mueller investigation as the tally of convictions, confessions and forced resignations mounts.
.. And even trade war might not do that much harm, as long as it’s focused mainly on China, which is only one piece of U.S. trade. The really big economic risk was that Trump might break up Nafta, the North American trade agreement: U.S. manufacturing is so deeply integrated with production in Canada and Mexico that this would have been highly disruptive. But he settled for changing the agreement’s name while leaving its structure basically intact, and the remaining risks don’t seem that large.
.. Now imagine how this administration team might cope with a real economic setback, whatever its source. Would Trump look for solutions or refuse to accept responsibility and focus mainly on blaming other people? Would his Treasury secretary and chief economic advisers coolly analyze the problem and formulate a course of action, or would they respond with a combination of sycophancy to the boss and denials that anything was wrong? What do you think?