The 23 OPEC+ countries are expected to decide on a major oil production cut on Wednesday. This move, aimed at raising oil prices, may seem surprising in a context of rising energy prices. Especially since one of the main beneficiaries of such a policy would be Russia. Explanation
These are the great gatherings of flesh and blood. Representatives of the OPEC+ countries -the 23 main oil producers- meet “face to face”, on Wednesday, October 5, in Vienna, for the first time since the start of the Covid-19 pandemic in 2020.
The 13 member countries of OPEC – led by Saudi Arabia – and their 10 oil-producing allies, starting with Russia, want to give this great meeting the most solemn stamp possible to “underline the importance of the decision that will be made there” . notes the Financial Times.
Save petro benefits
The vast majority of observers expect the announcement of a significant drop in oil production quotas to boost crude prices. A drop that could range between 500,000 and 1.2 million barrels less per day.
“At their last meeting in early September, the OPEC countries had already sent a signal by lowering production by 100,000 barrels a day,” said Olivier Appert, an expert on energy issues at the French Institute for International Relations (Ifri). It was just one drop of oil less in the ocean than the 100 million barrels being produced per day, but probably the goal was to prepare minds.
OPEC+’s stated desire to push prices up has already begun to take effect. The only rumors surrounding the probable announcement of a drop in production led to a rise in the price of crude oil of 4% in two days.
Seen from Europe, this decision may seem paradoxical or at least against the grain: while energy prices continue to skyrocket and Saudi Arabia, the United Arab Emirates, Russia or Venezuela continue to worry about their petro-profits?
Actually, they have what. “Oil prices have fallen to lower levels than they were before the outbreak of the war in Ukraine,” said Olivier Appert.
This drop is due in part to Beijing’s stubbornness in enforcing its “covid zero policy”. It has led to a sharp drop in economic activity and thus made China less energy intensive. In addition, the general decline in demand for oil due to a slowing world economy is also contributing to the drop in prices.
Oil prices didn’t even skyrocket after the sanctions on Russia. First, because Russian exports have also “been less affected by the timing than expected, as other countries, such as India, have taken over from Europe,” says Olivier Appert. This means that the supply of oil has not fallen and black gold has not become rarer. Furthermore, in the context of the war in Ukraine and Western sanctions, Russia’s new customers are in a strong position to obtain discounts on the price of oil.
And there is no glimmer on the horizon that can assure oil-producing countries and their allies that the trend will be reversed. Therefore, they decided to take matters into their own hands by betting on a massive drop in production quotas to put an end to the downward spiral.
A policy that plays into the hands of Riyadh… and Moscow
But it is a risky bet, both from a geopolitical and economic point of view. And especially for the leader of this oil cartel: Saudi Arabia.
Indeed, Riyadh has for decades projected the image of a staunch ally of the United States. However, his desire to strongly support oil prices in the current context runs counter to Washington’s strategic interests. So much so that “it could create a breaking point [diplomatique] with the United States,” said the Financial Times.
First, a rise in oil prices weakens US efforts to economically stifle Russia. The sale of black gold was Moscow’s main source of export earnings, far ahead of gas ($123 billion for oil in 2019, compared to $23 billion for gas). Any increase in the price of this hydrocarbon, therefore, will have a disproportionate impact on Russia, even if it sells it.
Therefore, Saudi Arabia risks appearing as Russia’s target ally in the face of economic sanctions. A drop in production may, as such, help Moscow continue to finance its war in Ukraine.
Above all, it would not be the first time that Saudi Arabia has been caught red-handed committing diplomatic infidelities in Washington for the benefit of Moscow, recalls the New York Times, in an investigation into new Russian-Saudi ties.
As Russian tanks prepared to cross the border into Ukraine in mid-February, Saudi Arabia concluded a series of juicy investments (more than $600 million) in Russia’s top three energy giants (Gazprom, Rosneft and Lukoil). Within OPEC, Riyadh has also been campaigning for several months to offer a greater role to Moscow.
Much more concrete gestures than the much publicized “check” between US President Joe Biden and Crown Prince Mohammed bin Salman in July. Aside from these photos, the White House occupant “hadn’t gotten much out of this trip to Saudi Arabia in terms of commitment to oil production,” recalls Olivier Appert.
At the risk of angering Washington?
As if that weren’t enough, OPEC+’s likely decision to cut oil production comes at the worst economic time for the United States. Rising oil prices are likely to fuel inflation as prices at gas stations are expected to rise. Clearly, this is not news that can please Joe Biden and the Federal Reserve, who are engaged in a fierce fight to try to stop inflation that has reached levels not seen in almost 40 years.
Therefore, this OPEC+ meeting could expose the diplomatic divide that is being created between the two historical allies.
And it is no coincidence that Saudi Arabia now risks appearing as the great villain of the moment for Washington and its allies by chance. “There was an agreement in force since 1945 between the United States and Saudi Arabia that stipulated that the former ensured the protection of the latter in exchange for a supply of energy. But this situation has changed, in particular with the eruption of shale gas and oil in the United States,” says Olivier Appert.
As of now, the United States has become the world’s leading oil producer and thus has less need of its Gulf partner. “Already in 2010, Barack Obama pointed out that the change in the oil context allowed him greater diplomatic freedom with respect to Saudi Arabia,” explains the Ifri expert.
Riyadh has understood this well and, in a sense, the ease with which the country is about to make a decision that will further its benefits and Washington’s number one enemy at the moment illustrates this awareness.
Riyadh seems to have understood this well, as evidenced by the ease with which the country prepares to make a decision that will favor its benefits and those of Washington’s number one enemy.
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