Saudi-Russian Oil Axis Hits Biden for Production Cuts | Like My Trip

//Saudi-Russian Oil Axis Hits Biden for Production Cuts | Like My Trip


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OPEC+ has delivered a major blow to Western governments facing the worst energy crisis in half a century. Look no further than the words accompanying Wednesday’s oil production cut — an early move, an uncertain outlook — and it’s hard to see the move as anything other than an attack on a global economy that desperately needs oil prices to stay low.

Throughout its history, OPEC – and its new incarnation, the OPEC+ alliance – has never held back output so much, and so quickly, when Brent was still toying with $100 a barrel. Triple-digit prices are used to push the group into increasing output, not the other way around.

Breaking with tradition, OPEC+ announced on Wednesday that it will cut output by 2 million barrels per day – on paper – in November. Because many of its members are not meeting their output targets, the actual cuts would be smaller, about 950,000 barrels per day, and largely managed by Saudi Arabia, the United Arab Emirates and Kuwait.

For most of the past two years, the oil company has chosen a gradual, phased approach to managing supply. On Wednesday, it chose “shock and awe” – it is difficult to reconcile a large cut with the word modest. OPEC+ officials did not explain why the organization needs to cut immediately and significantly, other than to say they want to be ahead of the curve. Has oil demand growth collapsed? Is non-OPEC supply growing faster? Are fuel bills increasing? None of this seems to be the case.

If anything, the fourth quarter looks more difficult than the one that just ended. Saudi Energy Minister Prince Abdulaziz bin Salman justified the move saying he could not gamble with the market. By cutting too early and too quickly, OPEC+ is gambling with the world economy instead.

Riyadh and its allies also extended for one year, until the end of 2023, their alliance with Russia, the “plus” in the acronym OPEC+. The Riyadh-Moscow alliance, which began six years ago, is becoming a permanent axis, redrawing the geopolitics of energy. Make no mistake, this is a dangerous development for the future of energy security.

In a world where even China has concerns and questions about Russia’s policy, Saudi Arabia today is one of the only reliable friends that Putin has left. It may just be pure business – an oil price that’s good for Moscow is also good for Riyadh – but it’s increasingly seen as politics, too.

Four weeks before the US midterm elections, many in Washington took the unexpected major cuts as a personal attack on President Joseph Biden. The fact that OPEC+ hastily gathered in person in Vienna, rather than via video conference as scheduled, reinforced that view. The format of the meeting was as important as the material. As Roger Diwan, a veteran OPEC watcher, noted, it was “shocking” to see the cartel jump to action on Yom Kippur, nearly 49 years to the day of the start of the 1973 Arab oil embargo.

The face-to-face meeting allowed Alexander Novak, Russia’s deputy prime minister under US sanctions, to travel to Vienna. He took the opportunity to warn that Russia will stop supplying goods to any country that accepts the G7 oil price. OPEC+ cuts make the threat easier to carry out, and therefore more worrisome.

Cutting oil output will have two major consequences. Economically, it will keep inflation high for a long time, forcing the Federal Reserve and every other major central bank to adopt more restrictive monetary policies, increasing the likelihood of a global recession. Politically, it is complementary to Russian President Vladimir Putin in two ways. It funnels more money to the Kremlin, which is desperate for revenue to keep its war machine in Ukraine alive and to buy domestic support for a faltering military campaign. And it signals that Riyadh is in the Russian camp, ready to publicly ignore Washington. Others in the Middle East, Africa and Asia will feel better staying in Russia.

Riyadh and its allies have arguments about the risks of a recession, however. The business cycle has turned. Look at the production of plastic, for example, which is quickly falling. History has taught OPEC that demand growth can weaken quickly, as it did in 1997, 2008 and 2020.

But there are balancing forces that would buy OPEC+ time before it needs to act, allowing for a more gradual approach. For example, global oil inventories are below their five-year average, and diesel stocks are at their lowest in the winter. Supply risk also helps OPEC: European sanctions on Russian oil exports are about to begin, amid slower-than-expected growth in US shale production and the end of US and European exports from their strategic petroleum reserves .

Despite all that OPEC+ officials complain about US monetary policy, the resulting strong dollar is working in their favor. Unlike during the last great oil price crash in 2008, when the trade value of the US currency was at a multi-decade low, the purchasing power of a barrel of oil, priced and sold in the greenback, is now high. That’s important for Saudi Arabia, which imports 60% of its imports from Asia and Europe.

The United States and its Western allies should take note. For the first time in recent energy history, Washington, London, Paris and Berlin do not have a single partner within the OPEC+ group. During 1973-74, the White House could rely on Iran, which is still controlled by the Shah; in 1979, during the Islamic Revolution, Saudi Arabia was a supportive friend. In 1990, when Saddam Hussein invaded Kuwait, the Saudis and Venezuelans came to the rescue. Even in 2003, when Washington went to war in Iraq, Saudi Arabia helped.

This week, Biden officials found their emergency calls to Riyadh, Kuwait City and Abu Dhabi largely unanswered. OPEC+ is making mistakes, but Western governments need to rethink their energy policies, too. They should increase all their domestic sources, including oil, gas and nuclear but also expand to renewables including wind and solar.

Energy security is as important today as it was nearly half a century ago when the Arab oil embargo began. But safety starts at home.

More from Bloomberg Opinion:

The Big Problem of Russia’s Oil Market Sanctions: Aspects of Julian Lee

Peak Oil Has Finally Arrived. No, Really: David Fickling

Is Putin Making Full Use of Nord Stream Pipelines?: Javier Blas

This column does not reflect the views of the editorial board or Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is the co-author of “The World is for Sale: Money, Power and the Traders Who Transform the World’s Resources.”

More stories like this are available at bloomberg.com/opinion



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