According to M.K. Bhadrakumar, a former Indian diplomat, the recent shocking
oil production cuts from May outlined by the OPEC Plus essentially
means that eight key OPEC countries decided to join hands with Russia to reduce
oil production, signaling that OPEC and OPEC Plus 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 barrels per day (bpd) from May to the end of 2023, 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 Plus previously, and the total additional voluntary production
adjustments touch a whopping 1.6 million bpd.
Fundamentally, many analysts had forewarned, the Western
sanctions against Russian oil creating distortions and anomalies in the oil
market and upsetting 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 Plus calls the production cuts a precautionary
measure aimed at supporting the stability of the oil market. In the downstream
of the OPEC Plus 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 Plus 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 Plus 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 Plus 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 United States to take
the dramatic step of suing OPEC nations; and, four, curb the US export of
gasoline and diesel.
To be sure, the OPEC Plus 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 Plus 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 Plus cut in oil output has come at an inappropriate time. But the woes of
Western economies cannot be laid at the door of OPEC Plus 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 Plus 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 Plus deal will return
to the level set when it was concluded in April 2020.
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 the 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 Plus 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.
