Despite repeated pleas from the U.S. that the Organization of the Petroleum Exporting Countries (OPEC), under the de facto leadership of Saudi Arabia, should not cut its collective crude oil production at its meeting last week it did just that. The White House had made it clear that a cut in crude oil production and the corollary rise in oil prices would lead to three outcomes that it sees as exceptionally dangerous for the world right now. First, it would add further impetus to the energy price-led surge in global inflation that has prompted rising interest rates around the world that are crimping economic growth. Second, it would significantly boost the state revenues of Russia, as a major exporter of crude oil and gas, enabling its illegal invasion of Ukraine to continue for longer on the back of that funding, costing more lives and increasing the likelihood of escalation into a global nuclear war. And third, it increases the chances that sitting U.S. President Joe Biden will do poorly in the November mid-term elections, making his government less likely to be able to deal effectively with the Russian- and Chinese-led security challenges that the world will face in the remainder of his presidency. Disregarding these entreaties from the U.S., and echoed by the major European states, OPEC, under Saudi Arabia, cut its collective crude oil production by a gigantic two million barrels per day (bpd). Market expectations had been for a possible cut of around one million bpd, with a very remote possibility of one and a half million bpd, if OPEC decided to ignore all its Western allies’ arguments against a reduction. However, the latest cut is the largest crude oil production reduction since the 9.7 million bpd decrease in May 2020 that was implemented expressly to rescue oil prices from the once-in-a-lifetime threat posed to them at the height of the Covid-19 pandemic. This most recent two million bpd cut is set to last for 14 months, until December 2023.
The immediate impact on crude oil prices of the cut was not as dramatic as some had feared, but it might yet be very serious indeed, as it coincides with two other market factors, which the Saudis know perfectly well. The first of these is that the long-running program of releasing one million bpd crude oil from the U.S.’s Strategic Petroleum Reserve (SPR) – begun with the specific intention of the White House itself to bring oil prices down in order to dampen down inflationary pressures across the West - are scheduled to end this month. The second of these is that a European Union (EU) ban on seaborne imports of Russian crude is scheduled to go into effect on 5 December, while the G7 group of major industrialised nations is also looking at the mechanics of placing a price cap on Russian energy exports.
Aside from knowing the huge upwards pressure that this historically enormous cut in crude oil supply would place on the global oil price, Saudi Arabia was also fully aware of the political ramifications of the cut for the U.S., for Europe, and for Russia, according to several sources in Washington and Brussels exclusively spoken to by OilPrice.com last week. “Senior EU energy security figures conveyed to leading OPEC countries that cutting crude oil production now could be disastrous for several proposed EU energy policies relating to Russian oil and gas sanctions, but these were ignored,” said one senior EU energy source. “The most senior figures in the Saudi government, including [Crown Prince Mohammed bin] Salman, also know exactly what these cuts and continued high energy prices mean for [President Joe] Biden in his mid-term elections,” he added. “The White House sees these OPEC cuts as a direct comment from Saudi Arabia’s highest leadership on what it thinks of the president, of our democratic process, and of our stand with our allies against the Russian invasion of Ukraine,” a senior energy source in Washington said to OilPrice.com last week.
As highlighted in all three of my books on the oil sector since 2015, there is a very clear link between oil and gas prices, the U.S. economy, and the chances of re-election as U.S. president. Historical precedent highlights that every US$10 per barrel change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, although recently this correlation has become even more dramatic. The corollary longstanding rule of thumb is that for every one cent that the U.S.’s average price of gasoline increases, more than US$1 billion per year in discretionary additional consumer spending is lost. It is a matter of historical fact, as shown in my new book on the global oil markets, that since World War I, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within two years of an upcoming election. However, presidents who went into a re-election campaign with the economy in recession won only once out of seven times (Calvin Coolidge in 1924, although strictly speaking he had not won the previous election but rather had taken up the position on the death in office of Warren G Harding). The U.S. economy contracted an annualised 0.6 percent quarter-on-quarter (q-o-q) in the second quarter of 2022, confirming the economy technically entered a recession, following a 1.6 percent q-o-q contraction on the first quarter of the year. Ahead of critical mid-term elections in November, President Biden faces not just a recession but also the prospect of severe vote-losing falls in the U.S. stock and housing markets.
Saudi Arabia’s core geopolitical alignment away from the U.S. and towards Russia began in earnest at the end of 2016 when the Kremlin stepped in to support the then-beleaguered OPEC at the end of the 2014-2016 Oil Price War. Back in October 2021, the meeting between Russian Deputy Prime Minister, Alexander Novak, and Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, to discuss broadening and deepening the two countries cooperation in the energy sector and others marked another confirmation of the ongoing attempts by Moscow to decisively split the Kingdom away from its long-time ally, the U.S. This was subsequently evidenced by further meetings between the two figures to agree several major joint projects and Saudi Arabia’s unwillingness to condemn Russian aggression in Ukraine or even to engage with President Biden over bringing oil and gas prices down. Saudi Arabia’s move towards China as well began in earnest when it offered to save Salman’s face in the disastrous initial public offering of Saudi Aramco in 2017. Again, this has been subsequently reinforced with a slew of deals aimed at increasing China’s hold over Saudi energy supplies and in Saudi’s willingness to support China’s efforts to undermine the hegemony of the U.S. dollar in the world’s energy markets.
Therefore, Saudi Arabia’s latest move to cut crude oil production, despite U.S. pleas not to do so, should not have surprised Washington, and yet it did, and it is infuriated because it thinks it was a directed attack on it, and it is right, it was. Initially, U.S. officials condemned the decision as ‘short-sighted’ but then White House National Security Advisor, Jake Sullivan, and National Economic Council Director, Brian Deese, called it out for what it was, saying in a joint statement: “At a time when maintaining a global supply of energy is of paramount importance, this decision will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices.”
They added that the Biden administration would consult with Congress on potential measures that would strike at OPEC’s control over oil prices, and this would include a resuscitation of the ‘No Oil Producing or Exporting Cartels’ (NOPEC) bill that would allow the producer group to be sued in U.S. courts for antitrust violations and could see the break up of Saudi Aramco and the reduction in its value to zero. The NOPEC bill already passed the Senate Judiciary Committee in May, having passed a House committee last year. Senate Majority Leader, and Democrat, Chuck Schumer stated just after this latest crude oil production cut announcement that: “What Saudi Arabia did to help [Russian President Vladimir] Putin continue to wage his despicable, vicious war against Ukraine will long be remembered by Americans…We are looking at all the legislative tools to best deal with this appalling and deeply cynical action, including the NOPEC bill.” Following this, and indicating cross-party support for a new aggressive approach to Saudi Arabia, Republican Senator Chuck Grassley, an original sponsor of the NOPEC bill, said that he will attach the measure as an amendment to the forthcoming National Defense Authorization Act.
By Simon Watkins for Oilprice.com