OPEC+ cuts reopen wounds between West and GCC members

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Ever since OPEC+ decided on its historic production cut of two million barrels per day during its October 5 ministerial meetings, the discourse has become heated on both OPEC’s and the West’s sides.

Western nations, led by the US, saw the production cut as a hostile act, coming at a bad time when the world is still dealing with the Ukraine war. The US is also accusing OPEC+ and its kingpin Saudi Arabia of openly siding with Russia.

From the OPEC+ vantage points things look different: the 23 countries are worried about a global economic downturn, central banks tightening policies and rising interest rates suffocating any potential green shoots of economic growth.

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US treasury secretary Janet Yellen accused OPEC+ of fostering inflation and endangering the global economy with its production cuts.

By the face of it, these are the largest cuts since the outbreak of the coronavirus pandemic. Yellen was particularly concerned about what higher oil prices would do to developing economies.

We have a classic chicken and egg situation: Will central bank tightening policies endanger growth, or will the production cuts of OPEC+ stimulate inflation by driving the oil price up?

We first can establish that the cuts in real terms will be well below the headline numbers, because OPEC+ could not fulfil its quotas for a myriad of technical and geopolitical reasons. Most analysts assume that the real cuts will be between 800,000 and one million barrels per day.

The oil price has come down by around one percent since the weekend, after having appreciated by around 17 percent since September 26. These moves came on the back of a 25 percent decline in the oil price during the first quarter of 2022.

As always, the markets had already acted on the rumoured production cut, so were considerably less excited once it happened.

So, what is at the heart of the problem? It is geopolitics at its best. The US administration is concerned about the mid-term elections and the gasoline price at the pump. This price is only partly affected by the price of crude, and by constrained refining capacity. 

Saudi Arabia’s minister of state for foreign affairs Adel Al-Jubeir said as much on Fox News. “The reason you have high prices in the US is because you have a refining shortage that has been in existence for more than 20 years. You haven’t built refineries in decades,” he told Americans.

The overall problem is a lack of investment both in the upstream and downstream sectors. This is driven by a fall-off in demand during the pandemic and restrictive net zero targets that disincentivise anyone who wants to invest in the oil and gas sector. 

Truth be told, the GCC nations were the only ones still committing dollars to the oil sector while OECD nations weaned off the sector for the reasons stated above. By the way, windfall taxes on oil and gas companies, in the light of rising prices, will take away from their ability to invest.

OECD nations also worry about the effect on Russian production when their cap on the price of the country’s crude, and the ensuing difficulties for vessels to carry Russian oil, kick in at the beginning of December. However, this will be a direct result of G7, and not OPEC+, policies.

Janet Yellen has a point when she is worried about capital flows to developing and emerging economies in these troubled times.

In its August 4 blog, the IMF stated that during 2022 cumulative capital outflows from emerging markets were about $50 billion. The fund said the magnitude was similar to what was seen when the pandemic hit in March 2022, but the pace was slower. 

The big problem we face is that the discourse between the ‘West’ and the ‘East’ is getting increasingly high pitched and tense.

The US and its western allies feel that their remarks are protecting their interests. What they must realise though, is that OPEC+ consists of sovereign nations and that they will act to safeguard the interests of the group’s member countries, as is stated in the OPEC Charter of Co-operation.

What is needed now are cool heads and respectful discourse, because the US Saudi/GCC relationship does matter to the world at large.

There must be a way to engage in a civilised, fact-based discourse, devoid of polemic and harsh rhetoric on either side.

Cornelia Meyer is a business consultant, macro-economist and CEO of Meyer Resources