Opec+’s cuts will be viewed dimly by the US

Reuters/Heinz Peter-Bader

It came as quite a shock to the markets when Opec+ decided to cut oil production by around 1.16 million barrels per day this week. 

Saudi Arabia led Kuwait, the UAE and Algeria in announcing cuts. 

Russia, the world’s third largest oil exporter, will also cut off half a million bpd until the end of 2023.

All this led to a significant jump of $4.30 to $84.19 a barrel for Brent oil futures, with US crude rising $4.17 to $79.84. All in all, the move could jolt oil prices up about $10 a barrel. 

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The organisation represents its 13 members and accounts for around 80 percent of the world’s proven oil reserves. It also works with a new alliance of 10 Opec+ members that includes the likes of Russia, Oman, Bahrain, Mexico and Kazakhstan.  

This group had cut production back in October by two million bpd. Increasingly it has been able to cut production without a risk to its market share.  Only last month the price had dropped to nearly $70 a barrel, the lowest for over a year.

Non-oil exporting states will not be happy. A further rise in oil prices will make fighting rampant global inflation much harder.

Many central banks will have to contemplate increasing interest rates once more and keeping them higher for longer. 

The US had tried to pressure Saudi Arabia into instead increasing output, fearful of the highest inflation rate in 40 years.

A spokesperson for the US National Security Council was forthright: “We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear. We’re focused on prices for American consumers, not on barrels.”

The politics of oil remains highly charged. Russia’s invasion of Ukraine has seen massive surges in oil and gas prices. This helped to balance the former’s economic losses due to sanctions, but only to an extent. 

So Russia will be happy. Higher oil prices will make it easier to cover the costs of the war when things have not gone its way on the battlefield. It also shows that it has an effective relationship with other major oil producers, not least Saudi Arabia, which President Putin will aim to build on.

It is, however, a mark of increased sensitivity in relations between the Biden administration and Crown Prince Mohammad bin Salman that the US position was overlooked.

The cooling of this historic relationship is the result of a number of factors, among them the kingdom’s irritation over US policy on Yemen, and US criticism after the killing of the Saudi journalist Jamal Khashoggi in 2018. The autumn oil production cuts also come just before the US midterm elections, infuriating the White House.

Saudi Arabia is advertising its independence. Its oil strategy will no longer be devoted to pleasing the US.

It is now possible that the kingdom will consider selling oil in Chinese Yuan rather than US dollars, something that only a few years ago seemed unthinkable.

Is the dollar going to be challenged as the world’s reserve currency? There is certainly competition for this now.

President Biden had stated that there would be consequences for the US-Saudi relationship after the Opec+ cuts last year. As yet, no sanctions have been announced. 

Biden could let out more oil from the US strategic reserve, having released 15 million barrels onto the market back in October. It is at the lowest levels for 40 years, so this is not an appealing option either.

He could try to go back to the Saudis on bended knee but this would be a damaging sign of American weakness.

Beyond that, the US and others have few other options. The cuts will fuel those in non-hydrocarbon states who push for greener cleaner energy sources. Many will argue even more fervently that being reliant on Saudi Arabia and Russia is a weakness. The kingdom’s reputation as a reliable supplier could be compromised.  

Businesses will have to factor higher prices in for some time. They should hope that tensions in the Middle East do not intensify and that the Chinese-brokered deal between Saudi and Iran might help to keep things calm.

Why is the kingdom doing this? It and other Opec states deny their decision has anything to do with the situation in Ukraine. This is in part true but Saudi and many of its GCC partners have certainly not backed Russia’s neighbour.

The kingdom for its own domestic interests needs a high price to cover its increasing costs. Other exporting states are facing similar issues.

It also has ambitious long-term plans, intending to boost its maximum oil production capacity to 13 million bpd by 2027 and gas production capacity by 50 percent by 2030.

The global economy will need to adjust. These production cuts are here to stay.

The US and others may complain, but Saudi Arabia, Russia and others are in no mood to listen.

Chris Doyle is director of the Council for Arab-British Understanding