Saudi Arabia, a major strategic ally of the US, has been at the centre of an oil output cut dispute with Russia that unleashed a price war and sent already-volatile crude prices to their 18-year lows.

American senators from oil-producing states reproached the Saudi ambassador in a heated phone call and threatened to rethink diplomatic relations with the kingdom, according to their accounts of the conversation.

“We are going to fundamentally, not only reevaluate, but take actions that will start to undermine the long term relationship that many of us have supported,” Alaska Senator Dan Sullivan said, recounting what he and several of his fellow US senators told to the ambassador, Princess Reema bint Badnar Al Saud, during the call that allegedly took place in late March.

Sullivan told CNN that Princess Reema tried to convey her government’s talking points but got interrupted by the angry senators.

“I said ambassador, with all due respect, I don’t want to hear any talking points from you until you hear from all, I think there’s 11 or 12 on the call,” Sullivan recalled, adding that the senators were “not bluffing”.

“I organised this call so you could hear the anger from the voices of senators who have traditionally supported the US-Saudi relationship.”

GOP Senator Presents Bill to Pull US Troops From Saudi Arabia, Impose Tariffs on Oil Import

On 27 March, Republican Senators Kevin Cramer and Dan Sullivan introduced legislation to remove US troops and defence systems from Saudi Arabia unless Riyadh reduces its oil output amid an unprecedented drop in global oil prices.

Republican Senator Bill Cassidy, representing Louisiana, a major oil producing state, introduced on Thursday legislation that would pull all US troops out of Saudi Arabia unless the kingdom, the world’s largest oil exporter, reduces its crude oil output.

Cassidy’s bill, calling to take “certain actions in response to Saudi Arabia’s aggression towards the United States petroleum industry”, suggests withdrawing US troops from the kingdom “not later than 30 days after the date of the enactment”, more quickly than earlier legislation submitted by Senators Kevin Cramer and Dan Sullivan in late March.

“Our nation’s economy, national security and the economic welfare of families across Louisiana is threatened by oil being dumped on the world market at below-production costs. The US spends billions protecting other oil producing countries and their ability to safely transport oil around the world. Now is the time to protect ourselves. Tariffs will restore fair pricing. Withdrawing troops placed to protect others recognizes that friendship and support is a two-way street,” Cassidy said in a press release.

Cassidy’s legislation also suggests implementing tariffs on oil imports from Riyadh within 10 days of enactment. He said that oil imports from Saudi Arabia would be “not less than $40 per barrel”.

The Senator argued that the extra supply by Saudi Arabia to the global oil market has resulted in pushing prices to 18-year lows, making it “impossible” for US energy companies to compete.

Contrary to the Cramer-Sullivan bill, Cassidy’s legislation does not require removing US Patriot missiles or THAAD defence systems from the kingdom.

The legislation would need to pass through the US Senate and the House of Representatives, which are currently out until at least 20 April and possibly longer due to restrictions implemented to slow the spread of the novel coronavirus (COVID-19) pandemic.

The bill was introduced prior to an announcement of a new OPEC+ oil output cuts deal.

On Friday, following a 10-hour online negotiation, all 23 countries of the OPEC+ alliance agreed on the need to reduce crude oil production by a total of 10 million barrels per day in the next two months, May and June, in a bid to stabilize the market. They also agreed on a new deal for two years with gradual cuts in oil production.

According to an unnamed source who was on that call, Senator Ted Cruz of Texas said that his state was “mad”. “The anger from the senators was unlike anything I have heard from this group,” the source was quoted as saying.

Oil market crash

The oil industry has contracted dramatically due to the coronavirus pandemic, which has caused a sharp drop in oil demand. That contraction was aggravated by a dispute over output cuts between Saudi Arabia and Russia, and the collapse of a deal that expired on 1 April was followed by Saudis flooding the market with cheap oil. As a result, oil prices dropped in March to a level not seen since the early 2000s.

US companies have started to lay off staff to cut costs. The Texas oilfield service giant Halliburton alone has laid off 3,500 workers for two months, while Apache, Tenaris SA and FTS International have cut more than 400 employees combined.

A Republican senator on Thursday introduced legislation to remove American troops from Saudi Arabia in a bid to put pressure on the kingdom, and there have also been reports that tariffs on oil imports and the suspension of military aid to Saudi Arabia are on the table.

The fall-out from the crashing prices has resonated particularly strongly across the shale patch, where the breakeven price is higher than that of conventional oil. Analysts predict that the oil industry could lose from 50,000 to 75,000 jobs if prices continue to drop – at a time when jobless claims in the US already exceed 16 million.

The OPEC+ deal

Much depends now on diplomatic developments. On Thursday night, Saudi Arabia, Russia and other petroleum-exporting nations tentatively agreed to cut production by 10 million barrels per day in May and June. The deal would then see total daily output fall to 8 million barrels per day less than at a time recorded in 2018 for the rest of the year and then to 6 million barrels per day less than the benchmark production volume from January 2021 to April 2022. ​

The agreement has yet to be finalised, as Mexico, a large oil exporter, rejected a proposed reduction to 350,000 barrels per day less than the benchmark and said it was only able to cut production by 100,000. US President Donald Trump then intervened and offered to make up for Mexico’s quota with an additional 250,000 cut. Mexico agreed, but it is unclear whether Saudi Arabia has accepted the idea.

Neither is there evidence that the cuts – which are set to become the biggest in history – will be enough to prop up the prices, given that the oil demand destruction is projected to reach anywhere between 20 and 30 million barrels a day, much more than is currently being proposed.

Saudi Arabia and Mexico are expected to discuss clearing the last hurdle on Saturday. American senators will also speak with the Saudi energy minister later in the day.

“We'll see what he says,” Sullivan told CNN. “But at this point actions are going to speak a lot of louder than words.”