Source: International Energy Agency, Oil Market Report, December 2024. Spare capacity indicates capacity levels that can be reached within 90 days and sustained for an extended period minus November 2024 production volumes. OPEC-9 excludes quota-exempt Iran, Libya, and Venezuela.
When President-elect Donald J. Trump comes back to the White House, the Gulf Arab states should expect alignment and opportunities on energy issues but some friction as well. Energy may not be at the top of the U.S.-Gulf agenda, but as Trump seeks to maximize U.S. oil and gas output and choke off Iran’s oil exports, he will have no qualms about leaning into oil market issues and calling on Saudi Arabia and others for support.
Relations with the Gulf states have been fraught under President Joseph R. Biden Jr., whose administration came into office determined to accelerate a transition away from fossil fuels and limit security entanglements in the Middle East. Biden’s campaign trail comments in 2019 suggesting a U.S. shift away from the Middle East and calling Saudi Arabia a “pariah” chilled the relationship with Saudi Arabia, which thawed but never quite warmed despite years of careful diplomacy. Clean energy cooperation was a strong point for Washington’s relationship with the United Arab Emirates, especially in the run-up to the COP28 United Nations Climate Change Conference. But by and large, the Gulf Arab states remained skeptical about the Biden administration’s energy priorities and assumptions regarding the pace of the energy transition.
In contrast, Gulf leaders know what to expect from Trump: an “America first” agenda, a desire to defy conventional wisdom and strike geopolitical deals, and a degree of unpredictability. In his first term, Trump attached special significance to the Gulf states. Saudi Arabia was the first country Trump visited as president. His administration expanded arms deals with Saudi Arabia and the UAE, and there was substantial concord between Trump and the Gulf Arab states on trade, economic cooperation, and investment. Trump’s signature foreign policy achievement was the signing of the Abraham Accords normalizing relations between Arab states and Israel. However, the Gulf states objected to his unquestioning support for Israel, and his tepid response to the September 2019 attacks on the Abqaiq oil facility and Khurais oil field in Saudi Arabia undermined Gulf confidence in U.S. security guarantees.
Now Trump is returning to a radically altered landscape in the Middle East, with a weakened Iran, an emboldened Israel, and a region weary of conflict and human suffering. Suspicion of Iran runs deep in Gulf capitals, but the 2023 China-brokered detente between Saudi Arabia and Iran showed a new willingness to set aside antagonism. Over the past year, the Iranian threat has also greatly diminished. Israel’s crushing response to the October 7, 2023 terrorist attack has bludgeoned Hamas and decimated Hezbollah leadership, and the fall of Bashar al-Assad’s regime in Syria threatens to splinter Iran’s “axis of resistance.” The region is deeply concerned about events to come in Syria and neighboring countries. But there is limited faith that Washington has the capacity or desire to broker peace. Instead, the Gulf Cooperation Council states want de-escalation, and they want to manage their own affairs.
Against this backdrop, Trump’s energy agenda raises some risks for the Gulf states. The president-elect has pledged to “unleash” U.S. energy, maximizing oil and gas production by cutting regulations, building more infrastructure, and promoting investment in fossil fuels. He plans to lift the Biden administration’s pause on approvals of liquefied natural gas projects in his first days in office. Trump’s “drill, baby, drill” slogan reflects his belief that the United States – now the world’s largest oil and gas producer – should leverage the geopolitical and market power of oil and gas exports.
Source: International Energy Agency, “Oil Market Report,” December 2024. Spare capacity indicates capacity levels that can be “reached within 90 days and sustained for an extended period” minus November 2024 production volumes. “OPEC-9” excludes quota-exempt Iran, Libya, and Venezuela.
In general, this “energy dominance” agenda is bad news for the Gulf. The stunning increase in U.S. oil production and exports over the past 15 years has undercut the market authority of OPEC and allied producers. Robust non-OPEC supply, above all from the United States, has more than offset the deep production cuts made by OPEC+ since 2022, and China’s economic slowdown threatens to stall the world’s key engine of oil demand growth. In early December, OPEC+ delayed for a third time its plans to restore production, and it now plans to gradually increase production over 18 months. Trump will shed no tears if the United States keeps eroding OPEC+ market share – especially as substantial spare capacity keeps oil prices in check.
Source: Kpler
However, the saving grace for Saudi Arabia and other Gulf producers could be Trump’s plan to squeeze Iranian oil exports. For months, Trump has threatened to restore “maximum pressure” on Iran by strengthening sanctions enforcement. When he pulled out of the Joint Comprehensive Plan of Action nuclear deal in May 2018 and reinstated energy sanctions that November, Iran’s oil exports plummeted. But in recent years, Iranian oil exports have bounced back, reaching more than 1.5 million barrels per day in some months. Market actors have circumvented sanctions through crude blending, ship-to-ship transfers, and illicit shipping practices. Iran has also offered price discounts to Chinese refiners who now buy nearly all of Iran’s oil. But most analysts agree that lax sanctions enforcement by the Biden administration has facilitated this trade. If Trump dials up the pressure on Iran – and finds a way to alter the behavior of China’s independent refiners – it is conceivable that Iran could lose 750,000 b/d to 1 million b/d of exports.
Saudi Arabia and other OPEC+ producers will welcome a tighter oil market but may have little desire to immediately fill the gap. A sharp decline in Iranian oil exports would create an opportunity to drain global inventories and steepen backwardation – a situation in which prompt prices exceed prices for future delivery, reducing incentives for storage. After years of growing OPEC+ frustration over its inability to control the oil market narrative, a loss of Iranian supply could be just what the doctor ordered.
Trump may expect Riyadh to jump at the opportunity to displace Iranian oil and act as market backstop, but the Saudis may be in no hurry to heed the call. A slower response would serve several purposes: to clean up inventories, alter market expectations, enjoy higher revenue, and avoid opportunistic moves that could create confrontation with Iran.
The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.
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