Authored by Zainab Calcuttawala via OilPrice.com,
It’s “Infrastructure Week” in Washington, and foreign powers are taking note.
Ahead of President Donald Trump’s upcoming visit to the Middle East, Saudi Arabia has promised to make $40 billion of its sovereign wealth fund available to the United States to bankroll part of the roughly $1 trillion in infrastructure improvements that Trump promised on the campaign trail.
The move is reminiscent of the KSA’s strategy amongst its allies in the Gulf Cooperation Council (GCC), as well as Morocco and Jordan. This GCC + 2 group of kingdoms is regularly showered with billions of dollars in gifts from its wealthiest members, earmarked for similar construction projects, allowing the most stable Arab countries to remain intimately connected through financial obligations. The monarchial structure of these countries allows the lead executive to accept the sizeable donations without much fuss from the public. It’s just the way things are done there, and citizens of those regions generally accept.
But using foreign funds, especially those from a country such as Saudi Arabia - which only garnered favorable reactions from 31 percent of Americans polled by Gallup in February 2017 – could be another political trap for Trump.
The KSA had gone all-in on Hillary Clinton before the election, expecting her to continue to tweak policies put in place by Barack Obama. Contributions from GCC nations, especially Saudi Arabia, to the Clinton Foundation total in the millions. Reports of the serial grand donations made voters question Clinton’s allegiances in the 2016 elections. Trump could suffer a similar loss in faith if he begins accepting funding from monarchies willy-nilly – though censuring the new commander-in-chief in the media for any questionable action has led to fierce resistance from the White House and far right.
Riyadh’s most recent $40 billion gift is an effort to court support in the Trump administration, especially as the Saudi Aramco IPO approaches next year. Deputy Crown Prince Mohammed Bin Salman met Trump at the White House in the early days of the new administration. Local media took to labelling the trip a “historic turning point” in bilateral relations – a marked shift from rumors regarding friction between the two countries during Obama’s tenure. Nonetheless, the Department of Defense continued to approve the KSA’s weapons orders for use in Yemen and other regional squabbles, and Trump will likely continue that legacy.
The new president has already declared his support for a new U.S.-Saudi program with $200 billion in direct and indirect investments over the course of his presidency for use in technical development in the energy sector and other advancements in financial relationships between the two countries. As Zero Hedge pointed out earlier this week, it would be ironic if the Saudi funds used for energy research end up discovering new ways to lower shale extraction costs for American producers.
Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries (OPEC), has led a vociferous effort to deter additional shale production, particularly from the Permian Basin. The modest jump in oil prices seen after OPEC agreed on a 1.2 million bpd cut allowed hundreds of rigs in the U.S. to reactivate, causing barrel rates to tumble as Libya and Nigeria also tallied rising outputs. Riyadh needs a strong barrel price to guarantee a hefty valuation for Aramco ahead of the IPO, which is why it announced that the nation would extend its cuts through March 2018. Saudi Arabian clout in the oil community would take a hit if the plan to rebalance supply fails over the next few months.
There’s nothing Trump can really do about shale production. Unlike oil-rich countries in the Gulf, Africa, and South America, where nationalized oil companies are the norm, the U.S. oil sector is highly privatized. The CEOs of ExxonMobil, Chevron, and the hundreds of other oil companies active in the country reserve the right to decide when to drill and when not to drill. On top of that, Trump’s campaign vow of unleashing exploration and extraction prospects in the U.S. makes it unlikely that the White House would use regulatory power to curtail future fossil fuel development. Carving out a niche in the new administration looks to be an uphill battle for Saudi Arabia.