Asked by journalists to explain OPEC+’s decision to cut oil production by 2 million barrels per day at once, while prices remain high and the world suffers from inflation, Saudi Energy Minister Prince Abdulaziz bin Salman pointed out that gas prices and coal rose much stronger.
To some this seems like a sinister analogy, writes Bloomberg: The rise in gas prices in the West is seen as Russia’s desire to use it as a political weapon, reducing supplies to Europe. Gazprom stopped selling gas to European countries on the spot market at the end of 2021, on the eve of Russia’s invasion of Ukraine, which helped drive up prices. And this year, he completely began to turn off countries one after another, ceasing to carry out deliveries under long-term contracts.
“After the gas market, now the oil market is becoming a weapon,” Roger Dyvan, an analyst who has been following OPEC for decades, told Bloomberg.
Helima Croft, director of commodities analysis at RBC Capital Markets and a former CIA analyst, expressed a similar opinion on the eve of a meeting of representatives of the cartel, when there were reports of the desire of Saudi Arabia and Russia to reduce production by 2 million barrels. By cutting gas supplies to Europe, Russia can now take action to undermine stability in the oil market, she said.
“Where is the militant action here?”
In reality, the market will lose less oil than stated. Many countries do not choose quotas anyway, and Saudi Arabia, the United Arab Emirates and Kuwait will have to cut production in OPEC first of all. If they comply with quotas, the real reduction could amount to about 1 million barrels per day.
However, in the West, the decision made by the Saudis is perceived as confrontational. Particularly since President Joe Biden, who pledged to make Saudi Arabia a “rogue” during the campaign, visited Riyadh in July and met with its de facto ruler, Crown Prince Mohammad bin Salman. Biden has repeatedly urged the Saudis to increase oil supplies to the market in order to reduce soaring fuel prices.
In the days leading up to the OPEC+ meeting, U.S. officials urged the Saudis and other cartel members to change their minds, Bloomberg reports. Following the announcement, White House press secretary Karine Jean-Pierre said, “It’s clear that OPEC+ is teaming up with Russia.” She called the cartel’s decision “myopic”.
“Show me where the militancy is here?” Abdulaziz ibn Salman objected to reporters. He explained the cartel’s position by the need to keep prices at a level that would stimulate long-term investment in the industry. Saudi officials have repeatedly said that the fall in oil prices since the beginning of June, caused by fears of an economic downturn, is due to the myopia of market participants who do not understand that there is not enough investment in the sector, and oil shortages are inevitable in the long term.
The desire to go for such a large reduction in oil production is due to geopolitics, and not just market fundamentals, argues Ben Cahill, senior fellow at the Center for Strategic and International Studies:
OPEC+ is resisting attempts by oil importers to influence the market, including a ceiling on the price of Russian oil, the use of US strategic oil reserves, and coordinated actions by buyers. This is a risky move.
The OPEC+ decision comes hours after EU countries agreed on an eighth round of sanctions against Russia, which includes capping the price of its oil. The ceiling should come into effect from December 5 for crude oil and from February 5 for petroleum products, when the European embargo comes into force.
Amrita Sen, chief oil analyst at Energy Aspects, said the decision to cut production by 2 million barrels was “highly political” and “a very clear signal of cartel dissatisfaction with the price ceiling” for Russian oil: “Regardless of whether the ceiling is effective in reality, they see it as a dangerous precedent.”
The same, which is not surprising, is considered in Russia. It will not sell oil to countries that follow the restriction, Deputy Prime Minister Alexander Novak once again warned interview Bloomberg. He called the price ceiling “a very bad precedent” and said Russia could temporarily cut production in response.
The decision of the Saudis can provoke both political consequences and an aggravation of the struggle for influence in the oil market. Democratic Senator and Foreign Relations Committee member Chris Murphy tweeted: “I thought the whole point of selling weapons to the Gulf countries despite their human rights violations, senseless war in Yemen, working against US interests in Libya, Sudan, etc. etc., is that when an international crisis hits, the Persian Gulf will choose America over Russia/China.”
Bill Farren-Price of the consulting company Enverus, who has long analyzed the work of OPEC, said Financial Times:
Saudi Arabia has put OPEC on a collision course with the free world. They have teamed up with Russia in the name of protectionist control of the oil market, just as consumers around the world are struggling with inflation and the rising cost of living. Riyadh is bound to face political consequences.
Washington has already pledged to continue to bring oil from strategic reserves to the market and to take “additional retaliatory measures” to increase the supply of oil. The White House statement also said that Biden will prepare legislative action with Congress to “limit OPEC’s control over energy prices.”
There has been a bill in Congress for about 20 years, known as NOPEC, that would allow the Treasury Department to sue cartel countries for antitrust violations and confiscate their US assets if found guilty. Now it can be taken into consideration again, writes The Wall Street Journal, citing lobbyists and analysts. Other options that congressmen are considering are a bill that would oblige the president to require OPEC countries to stop agreeing on production quotas and prices, as well as to take OPEC to court in the World Trade Organization.
Fearing a rise in oil prices following the entry into force of the European embargo and Russia’s response to limiting the price of its oil, Washington has already begun to take political measures to cool the market. True, negotiations on Iran’s nuclear program, which would allow the removal of sanctions from it, have stalled.
But now the presidential administration is negotiating with the Venezuelan government to ease sanctions in exchange for starting negotiations for a fair presidential election in 2024. If an agreement is reached and American Chevron and oilfield services companies return to Venezuela, the country’s production could more than double within two years – up to 1.5 million barrels per day.