On Wednesday of last week, OPEC+ members agreed to cut combined oil production by two million barrels per day, which is the largest cut in supply since before the pandemic. OPEC is the Organisation of Petroleum Exporting Countries, and the + group consists of several non-OPEC member countries, such as Russia and Mexico, that voluntarily support OPEC’s moves. With oil prices falling from their highs in early 2022, signs were pointing to an OPEC supply cut despite pleas from the West to refrain from doing so. Energy prices have been a major driver of inflation across the globe, and few people want fuel added – or in this case, cut – from the fire.
Critics of the move are saying that OPEC’s move has no other purpose than to cause economic harm to the West, a sort of rebuttal to the sanctions against Russia. Because the US has gone to great lengths to improve its relationship with Saudi Arabia, people throughout the United States feel that this is a major betrayal of trust. Some are urging the Biden administration to cut Saudi Arabia off of weapons and critical plane parts. The White House had been pressuring Saudi Arabia to refrain from making the cuts, saying that it would consider such an act to be “hostile”. Biden even met with Saudi Crown Prince Mohammed bin Salman in July to improve global energy security, a move that was widely condemned. Now, it is clear that the move was also fruitless, at least on the OPEC front.
There is another purpose of the cuts, at least according to cynics. They believe that OPEC is cutting supply, and therefore increasing prices, in an attempt to interfere with the upcoming American congressional elections in November. Russia, which is financing its war effort in Ukraine in large part via its petroleum exports, would be thrilled to take part. Many American politicians are saying that Saudi Arabia’s moves should come with consequences – mainly, that the US withdraw its troops from Saudi and the UAE to stop being the peacekeepers in a historically volatile region.
Is it really that bad?
One wrinkle in this entire story is the number itself. Two million barrels per day sounds like a lot, and it certainly is, but it may not be enough to actually increase prices all that much. That is because many OPEC nations are already producing significantly below their capacities. Considering these sub-quota productions, the true cut is likely closer to 900,000 barrels, which is still significant, but does represent only 45% of the announced cut. Instead of cutting 2% of the global supply, the true cut is more like 1%. While still not welcome due to inflation issues, it may not be all THAT bad at the end of the day. And the Biden administration still has some options; the White House could release more strategic reserves to stabilise gas prices. It may not be the best move for the country, but if it helps in the elections, it might prove to be too hard of a temptation to dismiss.