OIL: Hard Times Call for Extreme Actions
As some of 40 million barrels of Saudi Arabian crude oil targeted for the Texas-Louisiana Gulf Coast already begins to arrive, enough indignation might cause a call to action to stop this naked attempt to break the legs of America’s oil industry and by extenuation, the entire American economy.
Recently significant increases in our friend’s oil disembark tankers and head to refiners. At a time of the COVID-19 related demand collapse, Saudi exports to the U.S., almost unnoticed, multiplied four times from 366,000 bbl/d in February to over 1.4 million bbl/d in the first two weeks of April. This most recent batch of 40 million barrels represents seven times the recent average Saudi oil exports to our shores. Like insidious parasites invading an unsuspecting host, some, myself included, might consider this oil flood an act of war.
A decent quantity of these cargos certainly offloaded in Port Arthur, Texas, home of the Motiva refinery, designed to blend heavy sour, a euphemism for the high sulfur content variety produced in the Middle East deserts. In 2017, Saudi Arabia purchased from Royal Dutch Shell, the 50 percent of this industrial complex that it did not own. They became sole owners of Motiva, the largest refinery in America with a capacity of over 600,000 bbl/d. I remain bewildered that this obviously strategic asset transfer received little to no scrutiny from myriad Washington bureaucrats, most notably CFIUS.
Some are calling for a 30 or 40 dollar tariff as a stiff reminder that America won’t brook overt hostile actions. Others suggest we politely communicate our displeasure to our friends. Some lawmakers want to hear themselves talk and debate while nothing gets done. There is a better way.
Some Background:
Created in 1933, the Arabian American Oil Company (ARAMCO), a joint venture between Standard Oil of California and Texaco for the princely sum of $175,000, acquired the concession to wildcat drill the deserts of the Kingdom of Saudi Arabia. After forty-three years and billions of barrels raised, negotiations concluded for ARAMCO to handover all assets, including then proven reserves of 149 billion barrels, fully one-quarter of the planets total amount in the free world. Finalized in 1980, all sides camouflaged, reporting the deal as if it was an arms-length transaction. It was a genuine sale in name only and, in practice, one of the last of the grand list of expropriations and confiscatory taxation schemes carried out from Venezuela to Algeria and Nigeria in Africa and Iran and Iraq in the Middle East.
I searched and searched the internet for terms for what was effectively a seizure, and found no references. There was one innocuous sentence in 800 pages of Daniel Yergin’s “The Prize,” the quintessential epic history of oil. The Saudi’s “paid compensation, based on net book value, for Aramco’s holdings within the Kingdom.” The net book value means the acquisition price of the assets, less accumulated depreciation. The purchase of the reserves, or mineral rights, by far the most significant asset, might have been on the books for next to zero. The Kingdom made their money, not from leasing acreage, (they had granted the concession in 1933) but from a profits interest that started at thirty percent but by the 1970s had increased to sixty percent. The other assets would have been all of the drilling rigs, and any pipelines or gathering systems to transport the hydrocarbons. While these assets might have initially cost in the billions, accounting depreciation rapidly reduced book value to a tiny fraction of the original purchase price. Bottom line: the Kingdom of Saudi Arabia paid at most a few pennies on the dollar for the market value to ARAMCO, which by 1980, had morphed into Exxon, Mobil, Texaco, and Chevron.
The Solution:
The debate over an enormous special tariff on the Saudi Oil begs the issue. The Port Arthur Motiva refinery employs 2,300, almost all Texans. A counterproductive move to make the refinery uncompetitive, possibly force a slowdown or shutdown of operations, imperiling the livelihoods of hardworking local families.
A more productive, albeit provocative solution would be to, justified by national interest, announce immediate nationalization of the entire complex; just take it. Domestically, the immediate fallout will see vitriol spewing among extremists in both parties, creating yet another fissure within the populace. Arguments over propriety, legality, morality, will, temporarily at least, divert the talking heads monomania with COVID-19. Western world leaders will offer their sanctimonious condemnation, while the Middle Eastern hypocrite’s band together in denunciation of the “great Satan.” Such a draconian measure might induce a rare, one-off unity, between Shiite and Sunni, even the Saudi’s and Iran might pause their mutual vindictiveness. The anti-American world judiciary will weigh in. WHO will somehow tie the mistreatment of this misogynistic dictatorship, to Trump’s courageous and correct decision to cut off funding to this malicious puppet of China. The takeover needn’t be permanent, but should stand as a beacon to all, that in times of war and existential crisis, anything goes. The debate will spill over that America will never again attract foreign capital. If an investor from France cannot distinguish the Republic of America from a Middle East autocracy, perhaps they should go elsewhere.
But one thing is for certain. If our President can stand upright through these heavy winds, 40 million barrels of oil targeted for the Gulf Coast, some of it already arrived and awaiting instructions for offload, then our Saudi friends will, with haste reroute these cargos anyplace but America.
Reason, goodwill, fairness, reciprocity, honesty, integrity, and the basic rule of law are nouns that might have no Arabic translations. In a culture without such an ethos, pointing a cocked gun at the genitals is the most effective standard of communication. Our Saudi “allies” repeatedly demonstrate they don’t resolve ambiguities in our favor.
Extreme times call for revolutionary measures. While COVID-19 remains a challenging virus, our over-indulgent lockdown response threatens the world order in general and, if continued, an American depression in particular. The Saudis are not people we want dining at our dinner table.
