- U.S. President Donald Trump is expected to pressure Saudi Arabia and OPEC to lower oil prices.
- The longstanding U.S.-Saudi relationship, originally based on oil-for-security, has evolved since the shale boom.
- Saudi Arabia needs high oil prices to balance its fiscal spending.
One thing will have become extremely clear to Saudi Arabia’s Crown Prince Mohammed bin Salman in the lead-up to Donald Trump beginning his second stint as U.S. President. This is because he wants oil prices lower. He aims to achieve this by dramatically increasing oil exploration and production at home and by pressuring OPEC and its effective leader Saudi Arabia to lower their oil prices too, however they can. Surrounding this are various carrots and sticks that are part of the usual rough and tumble of dealmaking as Trump likes to practice it. These include demands for even more investment from Saudi Arabia into the U.S. than the US$600 billion it has already pledged and Riyadh signing a relationship normalisation deal with Israel. In return, the underlying promise from the U.S. is that it will guarantee the security of Saudi Arabia in the Middle East and beyond and, by extension, the continued reign of the House of Saud across the Kingdom. Trump has never wanted to see oil above the US$75-80 pb of Brent level. With his plans to dramatically increase U.S. production and to encourage more output from elsewhere, it is clear he wants the oil price even lower than this in his second term as president. Meanwhile, Saudi Arabia’s 2025 budget breakeven oil price is $98 pb of Brent, according to the IMF. So, there is a problem, and the problem looks remarkably like that which caused Saudi Arabia to launch the 2020 Third Oil Price War. This was also done to safeguard its oil market share so that it could ultimately steer oil prices above its budget breakeven level and secure its finances. U.S. Secretary of State Marco Rubio last week talked with Saudi Arabia’s Crown Prince Mohammed bin Salman about “the strength of the U.S.-Saudi partnership in this time of momentous change”. However, if that change becomes momentous enough that oil prices fall too far below the Kingdom’s budget breakeven level and stay there, the Saudis may feel they have no choice but to embark on another oil price war in the not-too-distant future.