Cartels are known to slash output to gain marketing muscle. But, the 23- member Saudi Arabia-led OPEC+ is an exception. The cartel, which includes 13 core members and 10 partner nations including Russia, met on 5 October in Vienna to decide on reducing crude oil output by two million barrels a day from August 2022. This cut would work out to 2.14 per cent of global crude production. On the face of it, the cut appears to be an economic decision taken in good faith, but it is not.
A visibly enraged Joe Biden, the American president, is viewing this move by OPEC+ as muscle-flexing. Biden is branding the OPEC+ decision as a politically-motivated move directed at America and aimed at pushing oil prices up in his region. Plus, the American Democrats are accusing the cartel of trying to hurt America during a harsh winter and maim Biden politically before the November mid-term elections.
The oil cartel’s decision marks a new low in America-Saudi Arabia relations as this is despite falling energy supplies from Russia and increased demands from America for more crude supplies from OPEC+. Inevitably, the relations between America and Saudi Arabia are straining now. https://www.cnbc.com/2022/10/06/oil-us-delivers- angry-rebuke-of-massive-opec-production-cut.html
Saudi Arabia Could be Penalised
Angered, Biden is threatening to review America’s ties with Saudi Arabia. He did say ‘there will be consequences’. America has a hunch OPEC+ is siding with Russia. As the preeminent OPEC+ accounts for 37 per cent of crude oil production, 16 per cent of natural gas generation and over 80 per cent of proven oil reserves, America is not prepared to ignore the cartel’s 5 October decision. Biden is convinced OPEC+ is an output-slashing and consumer-hurting cartel. He could now penalise Saudi Arabia by restricting security co-operation and arms sales. https://www.opec.org/opec_web/en/data_graphs/330.htm
Sure, Biden had a 2-hour meeting with Saudi Arabia’s 36-year-old Crown Prince and de facto ruler Mohammed Bin Salman, popularly known as MBS, in Jeddah on 15 July this year. The meeting happened despite opposition from global activists who believe MBS was complicit in the brutal killing of The Washington Post columnist Jamal Khashoggi in 2018. https://www.aljazeera.com/news/2021/2/26/mbs-oversaw- saudi-killers-of-khashoggi-us-intel-report
Despite Saudi Arabia’s cruel war against the rebel Houthis in Yemen and the kingdom’s gory record of human rights abuses at home, Biden went over to cajole MBS to produce more oil to end the oily streak of global shortages and price rises wrought by Russia’s Ukraine war. Yet, the OPEC+ decided to cut output. Biden’s hunch thus appears to be right.
Opportune Time in History
Desperate to prove the American critics are wrong, OPEC+ maintains the output-cut decision is solely guided by its desire to stabilise the market and reclaim control over prices. OPEC+ is citing how its members are sweating under bearish crude prices, worrying about a shrinking market, wringing hands at falling consumption and nursing fears over the global recession waiting at their doors. The cartel wants America to believe the decision to cut output was taken in good faith.
But, America is not buying into this argument. As the American dollar rallies, oil is becoming more expensive. Then, there is this constant fear OPEC+ might soon follow up with a floor price fixed well above the pre-pandemic levels. Undeniably, OPEC+ is at such an opportune time in its history when it is able to decide both output and prices. Biden is sure OPEC+ is grabbing this golden opportunity with both hands to teach Saudi Arabia a stern lesson.
Suspicious America’s Fears
While OPEC+ is relishing these developments, America is not humoured. An upset America is losing faith in the cartel’s commitment to fair and equitable oil prices in America. Thus, the credibility of OPEC+ stands damaged today among Americans. Suspicious, America believes the actual cut in oil output by OPEC+ could be higher enough to widen the gap further between projected and actual production. As if to confirm these fears, oil prices have moved up already by over 10 per cent in October and Saudi Arabia gets set to whittle down its output by 5 per cent. At the end of it, Brent could better the USD-100-mark by end 2022 and Saudi Arabia could continue with its output-cut right through 2023.
However, OPEC+ may not have the best of both the worlds. As the experience of its previous output-cut in 2020 shows, the cartel may continue to struggle to push oil prices up. Worse, an output-cut may shrink its market share further. Nevertheless, the MBS-led cartel wants to go ahead with its 5 October decision. Perhaps, just to spite Biden, who wants OPEC+ to raise its output well before the crucial mid-term elections in November.
Cut may Fall on Three Alone
In this Biden vs MBS tug of war, Biden wants to make sure OPEC+ does not align with Russia. If he gets desperate, Biden could sue OPEC+ under antitrust laws. But, slashing output may not yield best results for OPEC+ and MBS. As oil prices are pushed up, the cartel may see further loss in its market share and revenues. Plus, slashing output in a taut situation is sure to make the oil market more volatile. This would shoo away potential investors and lenders, and in the process, impair liquidity in oil exchanges.
When liquidity in oil exchanges gets hurt, diplomacy in OPEC+ countries will not remain immune. As quotas do not represent actual output, production-cuts will not be borne by all the 23 OPEC+ members. The cut may fall alone on Saudi Arabia, United Arab Emirates and Kuwait, the three members who are already handicapped from producing to their full potential. This would prod members like the United Arab Emirates, who are hoping to raise their capacities, to clamour for greater shares in output. However, weak members from Africa may oppose this in the hope of bettering their shares in future. https://www.washingtonpost.com/business/energy/oil-production-cut- could-be-10percent-real-90percent-illusion/2022/10/09/6f1ae3be-4798- 11ed-be17-89cbe6b8c0a5_story.html
Jeopardising Democrats’ Chances
Biden is not thinking so deep now. In all likelihood, he would listen to aggrieved senators who are demanding pruning sales of arms to Saudi Arabia, slapping sanctions on the kingdom and reworking America’s relationship with Saudi Arabia. Biden may even limit security co- operation and end OPEC+’s exemption from America’s antitrust laws. Irrespective of whether Biden does this or not, he is sure to have a serious rethink on redefining America’s relationship with Saudi Arabia.
Not the least, the most serious fallout of this output-cut is the boost Putin will get. As oil prices rise, Putin will have no worries over funding his 8-month-old Ukraine war. This is sure to frustrate America’s earnest attempts to make the war unsustainable. A prolonged war in Ukraine will push oil prices further up before the crucial mid-term elections, jeopardising Democrats’ chances of garnering a majority, both in the House and the Senate. Clearly, the OPEC+ decision to slash the output goes beyond oil, right into the domains of diplomacy and American politics. https://www.rferl.org/a/opec-russia-oil-prices/32067676.html. This is what Saudi Arabian supremo MBS wants..
In the immediate term, Biden may gear up to release an additional 10 million barrels of oil from its Strategic Petroleum Reserve in November. He may do this to offset, albeit partially, the reduction in oil output. In addition, to whittle down the influence of OPEC+ over oil prices, he may revive the “No Oil Producing and Exporting Cartels Act,” aka NOPEC, and empower America’s Department of Justice to file an antitrust lawsuit against the cartel. Plus, he may curtail shipments of defence arms to Saudi Arabia. Such a plan of action is sure to escalate the America-Arabia tensions. https://www.cnbc.com/2022/10/06/oil- us-delivers-angry-rebuke-of-massive-opec-production-cut.html
Not long before, on his 2020 presidential campaign trail, Biden had thundered he would turn Saudi Arabia into a ‘global pariah’. But, on 15 July, when a desperate Biden rushed to Saudi Arabia and gave MBS a firm fist-bump, neither did the American president snarl nor gnash his teeth. As OPEC+ is set to move ahead with its plan to slash output, MBS appears to be bent on turning America into a pariah for the oil- producing world. Is this how MBS wants to get even with Biden?