OPEC (the Organization of Petroleum Exporting Countries) is composed of 13 of the world’s leading oil-producing nations. With the aim of coordinating action and controlling the market, OPEC regularly invites 10 smaller oil producers to an expanded summit, known as OPEC+. The last such meeting took place on October 5.
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”.