An agreement signed with United States in 1945 will continue to haunt House of Saud for ever

I wrote a blog titled “And finally Saudi Arabia bows down before US mantra” on April 10, 2020, where the bottom-line was that Saudi Arabia has bent to knees before United States. Since then I wanted to explore what turned Saudi Arabia too feeble. 

Now I share with you the crux of my finding very briefly.

In my opinion, Saudi Arabia was put to its knees after United States put showed it the details of an agreement in 1945 between Franklin D. Roosevelt, President of United States and the Saudi King at the time, Abdulaziz, which defined the relationship between the two countries for the years to come. 

The deal that was struck between the two men at that time was that the US would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud.

The deal was altered slightly since the rise of the US shale oil industry. The US also expects the House of Saud to not only supply the US with whatever oil it needs for as long as it can but also that it will also facilitate the US shale industry to continue to function and to grow.

President Donald Trump has used this agreement to the US benefit. He has sensed a lack of understanding on the part of Saudi Arabia for the huge benefit that the US is doing the ruling family. He went to the extent of saying that [Saudi King Salman] would not last in power for two weeks without the backing of the US military. He also made it clear that without the US protection, either Israel or Iran and its proxy operatives and supporters could very soon end the rule of the House of Saud.

Trump has also said, “I will do whatever I have to do... to protect... tens of thousands of energy workers and our great companies,” and added that plans to impose tariffs on Saudi Arabia’s oil exports into the US were “certainly a tool in the toolbox.”

 Putting tariffs on Saudi oil rather than Russian oil made a lot of sense from two key perspectives. First, the US imports around 95% more oil from Saudi than it does from Russia, so sanctioning Russian oil would have little effect on supply glut prevailing in the US. Second, it was also a understanding in the US that Russia was in much better economic shape than Saudi to handle any shocks to its oil-related streams of revenue.

It is also the fact that Saudi currently provides one of the few large-scale sources of sour crude to the US, which is essential to its production of diesel, and to which purpose WTI is less suited. Gulf Coast refinery system of the US has invested heavily in coking systems and other infrastructure to better handle heavier crudes from the Middle East in recent decades.

The other major historical sources are not in a position to fill the gap, with US sanctions still imposed on oil imports from Venezuela, Mexican flows unreliable, and Canada’s pipeline capacity to the US not able to handle anymore exports south until the long-delayed Keystone pipeline is up and running till 2023.

It was strongly believed that Trump would use the threat of such tariffs to convince the Saudis that he is unpredictable enough to impose such taxes, regardless of the short-term economic consequences. As president, he was required to do something as around 44 million barrels of Saudi crude was expected to reach the US over the next four weeks. This was around four times the most recent four-week average, according to EIA records, and it was mostly due to be delivered to the already overwhelmed Cushing delivery point.

Reportedly, Republican Senator Kevin Cramer of North Dakota, who advises Trump on energy issues, has been calling on the White House to take action to stop the very large crude carriers from unloading and several senators and congressmen have threatened to vote to withhold military aid to Saudi Arabia.

Keeping in view the burgeoning ill-feeling towards the Saudis, sources in theUS Administration were desperate to exploit ‘No Oil Producing and Exporting Cartels Act’ (NOPEC). Pressure was building on Trump to finally sign off the NOPEC Bill ever since the Saudis announced to increase output.

The NOPEC Bill would make it illegal to artificially cap oil (and gas) production or to set prices, as OPEC, OPEC+, and Saudi Arabia do. The Bill would also immediately remove the sovereign immunity that presently exists in US courts for OPEC as a group and for each and every one of its individual member states. This would leave Saudi Arabia open to being sued under existing US anti-trust legislation, with its total liability being its estimated US$ one trillion of investments in the US alone.

The would have also entitled the US administration to freeze all Saudi bank accounts in United States, seize its assets in the country, and halt all use of US currency by the Saudis anywhere in the world. It would have also allowed the US to go after Saudi Aramco and its assets and funds, as it is still a majority state-owned production and trading vehicle, and ment that Aramco could be ordered to break itself up into smaller, constituent companies that are not deemed to break competition rules in the oil, gas, and petrochemicals sectors or to influence the oil price.

The Bill came very close indeed to being passed into a law in February of last year, when the House Judiciary Committee passed the NOPEC Act, which cleared the way for a vote on the Bill before the full House of Representatives. On the same day, Democrats Patrick Leahy and Amy Klobuchar and – most remarkably – two Republicans, Chuck Grassley and Mike Lee, introduced the NOPEC Bill to the Senate. Its progress was only halted after President Trump stepped in and vetoed it when the Saudis did what he told them to do, but the option is still available for a relatively quick turning it into law.