Energy circles have made much of the October 5 decision of the Organization of Petroleum Producing Countries and its Russian ally (OPEC+) to cut world production by two million barrels a day from November. This is the largest reduction in two years.
Posted at 12:00 p.m.
Unsurprisingly, this decision disappointed the American president, Joe Biden, since high oil prices favor Russia, a major world producer, which earns more income and can thus better finance its war in Ukraine. Moreover, the rise in gasoline prices that should ensue comes at a very bad time for the president, on the eve of the mid-term elections which promise to be hotly contested.
One cannot fail to think that Riyadh and Moscow acted in this way in all conscience by signaling their preference for a republican administration in Washington.
For OPEC+, this decision to reduce supply in an already tight market responds to a desire to recover oil prices which fell from $120 in March to $80 in the fall. Faced with a recession that it deems very likely, OPEC+ is seeking to take advantage of a last opportunity to increase its already exorbitant revenues this year.
For its part, Washington was forced this year to put 180 million barrels on the market by drawing on its Strategic Petroleum Reserve, in order to mitigate the impact of rising energy prices. This is clear proof that the United States can no longer rely on Riyadh as in the past to manage the global supply and demand for black gold.
Strained relationship with Saudi Arabia
The oil industry has changed a lot in recent years. Thanks to the shale hydrocarbon revolution in the 2010s, the United States holds vast amounts of oil and gas. They have become leading global suppliers and competitors of other major producers, including Saudi Arabia and Russia.
However, the American market is only made up of private companies. They essentially respond to market logic and not to political will, as is more the case with the state oil companies forming OPEC+. An American president cannot therefore count on Chevron, Exxon, ConocoPhillips and others to dictate the level of production in the name of national objectives.
Moreover, the shareholders of the American producing companies, still marked by the difficult years of the pandemic, demand that the juicy profits of this year be paid to them instead of being used to increase production.
This is where the privileged relationship with Saudi Arabia comes in. For decades, this State, thanks to its ownership of oil resources, the abundance of its reserves and the low cost of its production, has acted as a kind of central oil bank: always ready to intervene, under the American umbrella, to stabilize the market and limit price increases harmful to the economy and households.
This was the reason for President Biden’s visit to Saudi Arabia last summer: to encourage him to significantly increase his production. However, the latter has barely answered the call, adding only a few thousand barrels per day to its production, for the form.
For some time now, the historically close relationship between Riyadh and Washington has suffered some irritants.
In 2017, Saudi Arabia severed (then re-established in 2021) its ties with Qatar, unappreciative of the Qatari state’s support for political movements deemed unsympathetic to the Saudi regime. However, Qatar is home to the largest American base in the Middle East: its soldiers have been watching for 40 years to protect the transport of oil in the Strait of Hormuz.
The current administration also resents the excessive force used by Riyadh in its nearly 10-year war in Yemen.
Finally, the despicable murder of Saudi journalist Jamal Khashoggi in 2018 at the Saudi Arabian consulate in Istanbul, which the CIA attributed to the regime’s top leadership, significantly damaged trust between the parties.
This remoteness of Saudi Arabia vis-à-vis the United States, and its rapprochement with Russia, do not bode well for oil prices. If Riyadh is now leaning more towards Russia for concerted effort on supply management, the United States is losing a strong ally in its efforts to mitigate the deleterious effects of the geopolitics of oil on its economy and its citizens.