By M.K. Bhadrakumar
April 15, 2023:
Information Clearing House
-- The shock oil
production cuts from May outlined
by the OPEC+ on Sunday essentially means
that eight key OPEC countries decided to join
hands with Russia to reduce oil production,
signaling that OPEC and OPEC+ are now back in
control of the oil market.
No single oil producing country is acting as
the Pied Piper here. The great beauty about it
is that Saudi Arabia and seven other major OPEC
countries have unexpectedly decided to support
Russia’s efforts and unilaterally reduce
production.
While the eight OPEC countries are talking
about a reduction of one million b/d from May to
the end of the year, Russia will extend for the
same period its voluntary adjustment that
already started in March, by 500,000 barrels.
Now, add to this the production adjustments
already decided by the OPEC+ previously, and the
total additional voluntary production
adjustments touch a whopping 1.6 million b/d.
What has led to this? Fundamentally, as many
analysts had forewarned, the Western sanctions
against Russian oil created distortions and
anomalies in the oil market and upset the
delicate ecosystem of supply and demand, which
were compounded by the incredibly risky decision
by the G7, at the behest of the US Treasury, to
impose a price cap on Russia’s oil sales abroad.
On top of it, the Biden administration’s
provocative moves to release oil regularly from
the US Strategic Petroleum Reserve in attempts
to micromanage the oil prices and keep them
abnormally low in the interests of the American
consumer as well as to keep the inflationary
pressures under check turned out to be an
affront to the oil-producing countries whose
economies critically depend on income from oil
exports.
The OPEC+ calls the production cuts “a
precautionary measure aimed at supporting the
stability of the oil market.” In the downstream
of the OPEC+ decision, analysts expect the oil
prices to rise in the short term and pressure on
Western central banks to increase due to the
possible spike in inflation.
What stands out in the OPEC+ decision is that
Russia’s decision to reduce oil production by
the end of the year has been unanimously
supported by the main Arab producers.
Independent but time-coordinated statements were
made by Saudi Arabia, the UAE, Kuwait, Iraq,
Algeria, Oman and Kazakhstan, while Russia
confirmed its intention to extend until the end
of the year its own production reduction by
500,000 barrels per day, which began in March.
Significantly, these statements have been
made precisely by those largest oil producers in
OPEC, who have a record of fully utilizing their
existing quota. Put differently, the reduction
in production is going to be real, not just on
paper.
Partly at least, the banking crisis in the US
and Europe prompted the OPEC+ to intervene.
Although Washington will downplay it, in March,
Brent oil prices fell to US$70 per barrel for
the first time since 2021 amid the bankruptcy of
several banks in the US and the near-death
experience of Credit Suisse, one of the largest
banks in Switzerland. The events sparked concern
about the stability of the Western banking
system and fear of a recession that would affect
oil demand.
There is every likelihood that tensions may
increase between the US and Saudi Arabia as
higher oil prices will push inflation and make
it even more difficult for the US Federal
Reserve to find a balance between raising the
key rate and maintaining financial and economic
stability.
Equally, the Biden administration must be
furious that practical cooperation is still
continuing between Russia and the OPEC
countries, especially Saudi Arabia,
notwithstanding the West’s price cap on Russian
oil and Moscow’s decision to unilaterally cut
production in March.
However, the Biden administration has only a
limited range of options to respond to the
OPEC+’s surprise move: one, go for another
release of oil from the Strategic Petroleum
Reserve; two, pressure US producers to increase
domestic oil output; three,
back legislation that would allow the US to take
the dramatic step of suing OPEC nations; or,
four, curb the US’ export of gasoline and
diesel.
To be sure, the OPEC+ production cut goes
against the Western demand to increase oil
output even as sanctions were imposed against
Russian oil and gas exports. On the other hand,
the disruption in oil supplies from Russia
contributed to the rising inflation in the EU
countries.
The US wanted the Gulf Arab states to step in
and step-up oil production. But the latter did
not oblige because they felt that there wasn’t
enough economic activity in the West and there
were clear signs of recession contrary to
expectation.
Thus, as a result of the sanctions against
Russia, Europe is facing the complex situation
of inflation and near-recession known as
stagflation. In reality, the adaptive and agile
OPEC + read the situation correctly and has
shown that it is willing to act ahead of the
curve. At a time when the world economy is
struggling to grow at a healthy rate, the demand
for oil would be relatively less, and it makes
sense to cut oil production to maintain the
price balance.
All that the Western leaders can complain
about is that the OPEC+ cut in oil output has
come at an inappropriate time. But the woes of
Western economies cannot be laid at the door of
OPEC+ as there are inherent problems which are
now coming to the surface. For instance, the
large-scale protests in France against pension
reform or the widespread strikes in Britain for
higher wages show that there are deep structural
problems in these economies, and the governments
seem helpless in tackling them.
In geopolitical terms, the OPEC+ move came
after a meeting between Russian Deputy Prime
Minister Alexander Novak and Saudi Energy
Minister Prince Abdulaziz bin Salman in Riyadh
on March 16 that focused on oil market
cooperation. Therefore, it is widely seen as the
tightening of the bond between Russia and Saudi
Arabia.
In fact, in May, as the largest members of
OPEC join Russia in its unilateral reduction,
the balance of quotas and the ratio of market
shares between and amongst the participants in
the OPEC + deal will return to the level set
when it was concluded in April 2020.
The big question is, how Moscow might profit
from the OPEC+ decision. The rise in crude oil
prices particularly benefits Russia. Simply put,
the production cuts will tighten up the oil
market and thus help Russia to secure better
prices for the crude oil it sells. Second, the
new cuts also confirm that Russia is still an
integral and important part of the group of oil
producing countries, despite the Western
attempts to isolate it.
Third, the consequences of Sunday’s decision
are all the greater because, unlike the previous
cuts by the OPEC+ group at the height of the
pandemic or last October, today, the momentum
for global oil demand is up, not down—what with
a strong recovery by China expected.
That is to say, the surprise OPEC+ reduction
further consolidates the Saudi-Russian energy
alliance, by aligning their production levels,
thus placing them on equal footing. It is a slap
in the face for Washington.
Make no mistake, this is another signal
regarding a new era where the Saudis are not
afraid of the US anymore, as the OPEC “leverage”
is on Riyadh’s side. The Saudis are only doing
what they need to do, and the White House has no
say in the matter. Clearly, a recasting of the
regional and global dynamics that has been set
in motion lately is gathering momentum. The
future of the petrodollar seems increasingly
uncertain.
MK
Bhadrakumar is a former diplomat. He
was India’s ambassador to Uzbekistan and Turkey.
Views expressed in this article are
solely those of the author and do not necessarily
reflect the opinions of Information Clearing House.
in this article are
solely those of the author and do not necessarily
reflect the opinions of Information Clearing House.
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