The Organization of Petroleum Exporting Counties (OPEC) and its Russia-led allies of oil-producing nations struck a major blow against the West’s sanctions against Moscow after deciding on a massive supply cut of 2 million barrels per day starting in November, threatening to send energy prices even higher in an already tight market.
Long-time American ally Saudi Arabia appears to be breaking with its post-World War II foreign policy and aligning with Vladimir Putin’s Russia. Despite Moscow’s invasion of Ukraine, Riyadh’s snubbing of its Western partners and, more specifically, of Washington, comes after calls by the international community for the oil cartel to pump more to help the global economy and lower skyrocketing fuel prices.
“In light of the uncertainty that surrounds the global economy and oil market outlooks, and the need to enhance the long-term guidance for the oil market, and in line with the successful approach of being proactive, and pre-emptive, which has been consistently adopted by OPEC and non-OPEC Participating Countries in the Declaration of Cooperation, the Participating Countries decided to … adjust downward the overall production by 2 mb/d from the August required production levels, starting in November for OPEC and non-OPEC Participating Countries as per the attached table,” OPEC said in a statement on October 5.
In a monthly report on October 12, OPEC reportedly said in report oil demand will increase by 2.64 million bpd or 2.7% in 2022, down 460,000 bpd from the previous forecast, noting that the world economy has entered a time of heightened uncertainty and rising challenges, amid ongoing high inflation levels, monetary tightening by major central banks, high sovereign debt levels in many regions as well as ongoing supply issues.
Chris Weafer, the co-founder of Macro-Advisory, a business consultancy firm based in Moscow and Tashkent, told NE Global that OPEC is looking out for its own interests, but argued that though it’s damaging for Western economic interests and instead supports Russia “is coincidental”.
European lawmakers and some of their American counterparts have, for years, talked about a plan to move away from fossil fuels over the next decade as part of their efforts to deliver on climate targets.
“The message to OPEC leaders could not be clearer; within ten years the global demand for oil and gas will be significantly reduced and the value of OPEC country’s key export will be considerably reduced. It is therefore no surprise whatever that OPEC members will try to maximize export earnings for as long as possible so they can invest in an alternative economic future,” Weafer said. “They need to do this because some of their major customers have said they will stop buying the product in the early 2030s,” he added.
Part of this strategy is the reason why the European Union is not getting a lot of support for its request for more gas from major players like the United Arab Emirates or Qatar. “Europe is asking those countries to invest billions to produce more LNG, but will only guarantee to buy it for a few years as its environment agenda is now aimed at reducing fossil fuel use by the end decade,” Weafer said.
The reason Europe was caught off guard was due to the fact that the EU has not been following the generational political changes that have taken place in the Gulf states over the last 15-20 years. The new generation of leaders in Saudi Arabia, the Emirates, Qatar and across much of the Middle East are very different from the their fathers and grandfathers.
The older generation were closely tied to the West, particularly the United States, for security and technical support and would respond positively to Western requests for oil volume adjustments. The new generation, however, has exactly the opposite attitude. They are much more focused on their own national interests rather than a relationship based on strategic partnerships with the Americans or Europe.
The White House pushed back at the OPEC+ decision, calling it a “shortsighted” decision. National Security Advisor Jake Sullivan and NEC Director Brian Deese said in a statement on October 5 that President Joe Biden is disappointed by the OPEC+’s decision to cut production quotas while the global economy is dealing with the impact of Russia’s invasion of Ukraine.
“At a time when maintaining a global supply of energy is of paramount importance, this decision will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices,” the statement said. The White House was careful to say nothing about the potential impact of rising gasoline prices on the US mid-term elections in early November, where inflationary pressures, still registering as extremely high, are forecast to negatively influence the election results of Democratic Party congressional candidates. For the ruling Democrats, what could be more disruptive than a fresh batch of negative inflation headlines driven by rising fuel prices just before the elections?
Moscow is planning to maximize oil and gas sales to its close partners China, India and Turkey, as well as its traditional allies from the Soviet era in the Third World. Oil sales to the EU will be significantly reduced after Europe’s oil ban starts on December 6.
“Russia will do this by offering discounts to the global price benchmark, e.g. Brent. So, the higher the Brent price then the more money Russia will get for its discounted sales. It certainly suits Moscow for OPEC to cut production and to support the price,” Weafer argued.
The US Department of Energy will deliver another 10 million barrels from the Strategic Petroleum Reserve to the market next month, continuing the historic releases the President ordered in March, the statement said, adding that Biden will continue to direct SPR releases to protect American consumers and promote energy security. Biden has directed the Energy Secretary to also explore any additional responsible actions to continue increasing domestic production in the immediate term.
The White House called on US energy companies to keep bringing pump prices down by closing the historically large gap between wholesale and retail gas prices. “In light of today’s action, the Biden Administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices,” the statement said, adding that the decision by OPEC+ is a reminder of why it is so critical that the US reduce its reliance on foreign sources of fossil fuels.
With the passage of the Inflation Reduction Act, official Washington said the country is now poised to make the most significant investment ever in accelerating a clean energy transition, while increasing energy security by increasing its reliance on American-made and American-produced clean energy and energy technologies.
The US and Europe will now most certainly accelerate their efforts and spending to boost renewable energy sources – but that is at least three to five years away from making a difference to the energy mix. The price of energy will likely be higher than the historic average and supply concerns will last for at least three to five years, and will likely worsen over the next two to three years. Even taking into account the tendency of OPEC countries to overproduce, or cheat, on their official production quotas, price pressures will continue unless a drastic downturn in global economic activity emerges over the next year.
Since the announced cuts, OPEC+ ministers also announced that they will move away from monthly gatherings to convene every six months.
This article first appeared on NE Global Media, and is republished with permission.