On October 5, 23 members of the OPEC+ oil cartel (13 from OPEC) met in Vienna, and announced a cut in oil production of a breathtaking 2 million barrels per day. Their largest market intervention in decades, this has multiple implications.
Firstly, old US ally Saudi Arabia is leading the group, alongside Russia. They justify it as action to protect oil revenues amidst an expected global economic slowdown. It ignored US demarches and the US President's knuckle-bump with the Saudi Prime Minister Mohammed bin Salman, during Biden’s July visit to Riyadh. It is being interpreted as a snub to the US. The US National Security Adviser Jake Sullivan noted that “The President is disappointed by the shortsighted decision of OPEC+ to cut quotas when the global economy is dealing with the negative impact of invasion of Ukraine”.
What added insult to injury is that the decision comes four weeks before the crucial midterm congressional elections in the US which can tilt the control of the Senate and the House from Democrats to the Republicans. Escalation of fuel costs at pumps hit the average American directly & feed angst against the incumbent president. Are the two Mohammeds, one now president of the UAE and the other freshly minted prime minister of Saudi Arabia, acting to influence a shift of power back to former US president Donald Trump’s corner? Democrats have been less than comfortable with domestic strong-arming of critics in both those nations. Biden also held his nose to finally engage the Saudi prime minister after promising during electioneering to make an example of him over the charge of masterminding the US citizen and journalist Jamal Khashoggi’s killing.
Gulf rulers resent the pro-environment and decarbonisation agenda of the Biden administration. They also fear his Iran outreach. Republicans, especially the climate sceptics in Trump’s corner, would be preferable to Democrats saving the planet from carbon-fuels. Russians have allegedly interfered in the past to influence the US elections. Even the current UAE President Mohammed bin Zayed reportedly met Donald Trump’s camp in New York after the 2020 presidential election result when Barack Obama was still president. Business links between Trump’s family and Gulf ruling families were rumoured for a while but became clearer after his ouster from office.
Gulf rulers’ stance would be surprising even at normal times. But when the US and European Union are supporting Ukraine in its war with Russia it stings the US. OPEC’s Russian alliance stands extended till the end 2023. Russia’s Deputy Prime Minister Alexander Novak, despite sanctions against him, attending the Vienna in-person meeting was a demonstrable gain for Russia. The ball is now squarely in the US court.
The OPEC+ decision comes weeks before the European decision to cap the Russian oil price goes into effect. The sabotage of vital gas pipelines Nord Stream I & 2 also raises suspicions about the Russian role. This happens as winter approaches and European preparedness to discard Russian energy will be tested. OPEC+ justified its action as keeping ahead of the curve and anticipating likely demand shrinkage. Contrariwise this is price gouging that will help Russia conduct its war against Ukraine and swelling of Gulf rulers’ sovereign funds. Russia hopes to stabilise its collapsing fronts in east and south of Ukraine as its new conscripts get deployed.
Ironically, OPEC nears the half century mark since its informal creation in 1973, post the Israel-Arab war. But unlike during past supply-side crises like Iraq’s invasion of Kuwait in 1990, the US has no major oil producer on its side. The outcome may yet be different from the one OPEC+ anticipates. For one a number of oil producers are already producing below their quota. Thus the actual cut may be under 1 million barrels. The US also has influence with major producers like Iraq, which plans to double its output from 4.65 million barrels per day (mbd) to 8 million in collaboration with Total.
However, energy cost escalation will force central banks of major economies to further tighten monetarily, increasing the risk of global recession. Past experience shows that demand can collapse faster than OPEC+’s calculation. Oil supply and price management is hardly a science. What the oil producers have also ignored is they are earning in dollars when that currency has already strengthened.
Immediately India and especially China may be cushioned by the discounted oil sales by Russia. But that is an unsustainable arrangement as misery in the developed world will generate anger against discount obtainers. President Joe Biden would surely discipline the Saudis and Emiratis besides boosting the global supply side. They in turn may have calculated that massive protests in Iran diminish the possibility of the US clearing step-by-step normalisation of relations with Iran, including revival of the nuclear deal. That fear had given the US leverage in the Gulf. OPEC+ have gambled, united by fear and greed. It can be an expensive gambit for the world. It may end up equally costly for OPEC+.
The writer is former secretary, Ministry of External Affairs
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