With the global economy
struggling, largely due to the Russian invasion of Ukraine,
the US had for weeks pressured Saudi Arabia, OPEC’s leading light, not
to cut production, a move that would inevitably lead to a rise in oil
prices. In the event Washington’s
lobbying was disregarded, and the OPEC+ summit decided to reduce production by
2 million barrels per day.
President Joe Biden’s
press secretary, Jen Psaki, reacted angrily.
She accused OPEC of siding with the Russians, because higher oil prices could
only to generate more revenue for Russia to fund its war in Ukraine. The recriminations seemed a trifle
disingenuous, since Russia is itself an influential member of OPEC+, but the
charge has substance.
Crude oil prices, which
were peaking at around $120 back in June, have reacted to fears of a global
economic recession, rising US interest rates and a stronger dollar by falling
to about $90. Cheaper oil and gas for
the consumer acts as a restraint on inflation. When the OPEC+ cuts in
production start to bite, prices will certainly begin to rise. The main beneficiaries will be Russia and Saudi
Arabia.
Despite the heavy burden of sanctions, Russia still enjoys a vast, if diminished, income from its oil exports which enables it to maintain its military adventure in Ukraine. The inevitable increase in the oil price following the decision by OPEC+ will no doubt be greatly welcomed by President Vladimir Putin – something he vigorously denies.
On October 11 he defended
the planned cuts, saying “our decisions … aren’t directed against anyone.” He described the OPEC+ agreement as being aimed
at ensuring stability in global energy markets.
The purpose, he maintained, was the economic necessity of balancing
supply and demand, thus giving confidence to both the consumers and the
producers of energy.
As for Saudi Arabia, one
commentator pointed out that the Saudis need the money. “They need to keep the
price as high as possible. They have so many schemes and projects in the
kingdom … so they need all sorts of cash in order to keep that going.” He was referring to the ambitious and
immensely costly Saudi 2030 project being master-minded by Saudi’s Crown Prince
Mohammed bin Salman (MBS).
The US regards the OPEC decision
as a snub by the Saudis. With the US midterm elections just around the
corner, Biden is aware of the negative effect higher gas prices will have on
voters. He has threatened the Saudis
with “consequences”, without so far specifying what these might amount
to. Prominent Democratic senator Bob
Menendez, chairman of the Senate Foreign Relations Committee, suggested the US should
immediately freeze all cooperation with Saudi Arabia, including arms sales.
The flood of disapproval
and criticism spurred Saudi Arabia to issue a statement on October 12 justifying
the decision by OPEC+. It began by
totally rejecting any suggestion that Saudi Arabia was taking sides in
international conflicts or was politically motivated against the US, pointing to
how it has voted in support of UN resolutions on the Russia-Ukraine crisis.
As for the decision to
reduce oil production, the statement pointed out that it had been taken unanimously
by all members of the OPEC+ group, and was based on purely economic considerations
such as limiting volatility in the oil market, and maintaining the balance of
supply and demand.
Needless to say, the Saudi
statement did nothing to curb the continuing crossfire of accusation and
counter-accusation. The West accuses Russia of weaponizing energy, creating a
crisis in Europe that could trigger gas and power rationing this winter. Moscow accuses the West of weaponizing the
dollar and financial systems, and distorting global economics through its
sanction regimes.
In fact, the OPEC+
decision is not quite as clear-cut as first appears. While it will certainly result in a decrease
in oil production overall, some countries managed to negotiate an
exemption. Libya and Nigeria, for
example, will be allowed to increase their current outputs in recognition of
local difficulties affecting oil production. More worryingly, so will Iran, which has declared
the agreement a diplomatic triumph.
The concession to Iran was
provided on the assumption that the current talks on reviving the nuclear deal could
succeed. If so, a large tranche of
sanctions on Iran would be lifted, allowing its oil industry to revive. Since Iranian
crude could then supply countries seeking to free themselves from Russian
energy dependence, this is an outcome welcomed by some voices in the West. One oil industry analyst believes that Iran
has built up a sizeable flotilla of cargoes, amounting to some 93 million
barrels of Iranian crude, that could reach the market fairly quickly, should a
nuclear deal be concluded.
The OPEC+ decisions
perform a complex balancing act. On the
one hand, overall oil production is to be reduced, guaranteeing a rise in consumer
oil and energy prices to the political benefit of both Saudi Arabia and Russia. On the other, Iran is being positioned to
weigh in with substantial new oil supplies that could bring relief to European and
world markets urgently seeking alternative energy sources.
In short, neither Saudi
Arabia nor Russia can claim that the decisions taken at the OPEC+ meeting on October
5 were “purely economic”.
Published in the Jerusalem Post, 1 November 2022:
https://www.eurasiareview.com/11112022-was-opecs-decision-to-cut-oil-production-purely-economic-oped/
Published in Jewish Business News, 11 November 2022:
https://jewishbusinessnews.com/2022/11/11/was-opecs-decision-to-cut-oil-production-purely-economic/
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