Arshad Shaikh studies the recently announced production cuts by OPEC. They are likely to boost crude oil prices and help the revenues of OPEC members along with Russia. The European Union (EU) and the United States accuse OPEC’s decision to be politically motivated. Both the EU and the US have declining growth rates and high inflation. The cuts have sparked fears of recession and global slowdown. OPEC members counter the accusations as ‘spin’ and propaganda. They claim that their ‘output’ decisions are non-political and aimed at stability and security for the energy markets. It is very rare for the oil-rich Gulf countries to stand up to the US might. The war of words between OPEC and the West is thus quite dramatic and hence inviting frenzied media attention.
The Saudi Energy Minister, Prince Abdul Aziz bin Salman, had a widely reported public spat with a Reuters journalist in Vienna. OPEC members were having their first face-to-face meeting since the pandemic. The Saudi Minister was part of the OPEC leadership addressing the media regarding the decision to undertake their largest production cuts since 2020. The Energy Minister from the oil kingdom was miffed at a Reuters report, accusing it of colluding with Russia to press for cuts and boost prices.
As soon as the reporter began his question, Prince Abdul Aziz retorted, “You talked about Russia doing this and that. Actually, the day that your story came out, no one from Russia talked to me nor I talked to anybody from Russia. You repeated that again with another tale of a story that Saudi and Russia are congregating around a hundred-dollar price. That is not true. I spent 20 minutes with one of your respected members of Europe in Dubai explaining to her or actually 25 minutes why we don’t go as Saudi Arabia for price targeting and that 25 minutes went in vain and I really don’t like that. I acted in a very respectful way emanating from respecting the agency. But you elected to choose a phantom Saudi source. If you have questions, direct them to others but not me. I am not talking to Reuters until you respect the source, which is the Energy Minister on behalf of the Saudi government. Okay, thank you so you ask the questions to any of my colleagues.”
The video of this interaction went viral on social media, especially in the Muslim world. It was one of those rare instances where the Saudis held their ground against the media spin often deployed by the West against their adversaries.
However, histrionics apart, the real issue at hand is the impact of these oil cuts on the global economy. Will this fuel a recession? How does Russia stand to gain from these cuts? Why did OPEC cut production when crude prices were still high? Is there a political twist to the story? Are we entering a new phase in the relations of the GCC with the EU and America? The answers to these questions may well define the future of the energy markets and even the world.
THE RUSSIAN ANGLE
The Organisation of the Petroleum Exporting Countries (OPEC) is an intergovernmental organisation of 13 countries headquartered in Vienna, Austria. These countries are Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates and Venezuela. They account for about 44% of global oil production and 81.5% of the world’s proven oil reserves. This gives OPEC overwhelming power to dictate global oil prices and hence wield considerable power and influence in international relations.
Russia is facing sanctions by the West over its invasion of Ukraine. The US and the European Union are desperate to choke Russia for funds to weaken its resolve and grip over Ukraine. Hence, the OPEC decision along with Russia to undertake a production cut of about two million barrels a day (2% of the global supply) was a rude shock to the West.
The increase in oil prices would benefit Russia and dilute the effect of sanctions. The US and the EU immediately took offence to this decision and called it a ‘political alignment’ with Russia. The stated position of OPEC is that “when we enter the OPEC building, we leave our politics behind.”
The OPEC Secretary General, Haitham al-Ghais (representing Kuwait), told a prominent TV channel: “This was not a decision from one country against another. I want to be clear in saying this, and it’s not a decision from two or three countries against a group of other countries.”
OPEC JUSTIFICATION AND RECESSION FEARS
Brent Crude is the international benchmark for oil prices. At the beginning of 2022, Brent prices were close to $79 per barrel rising to $127 in March after Russia invaded Ukraine. This was the highest price in 14 years. Currently, prices are around $92 and are expected to rise further after the OPEC cuts take effect. Experts are predicting the price to touch $100 per barrel by December.
Higher oil prices along with a resurgent dollar will be a double whammy for the global economy. Higher fuel costs lead to inflation and lower purchasing power leading to suppressed demand.
Inflation also makes central banks raise interest rates that reduce credit offtake and investment, further slowing the economy. OPEC’s justification is based on the premise of striking a balance between acceptable oil prices and the income required by energy suppliers. They foresee lower demand due to high-interest rates and prices settling in a range that is not to their liking. They want to correct the future price through production cuts so that it settles at somewhere in the $90 plus range.
Many political analysts view the OPEC cuts led by Saudi Arabia as a snub to the Biden administration. The newly appointed Saudi Prime Minister, Prince Mohammed bin Salman, the de-facto ruler of the oil-rich kingdom, was the target of a sustained America-led political campaign that blamed him for the murder of journalist Jamal Khashoggi. This did not go down well with the Saudis who saw it as a betrayal by someone they consider a close ally and their security guarantor.
The OPEC cuts were coincidentally announced on the same day as the world experienced its first oil shock. Fifty years ago, Israel attacked Arab states in what is known as the “Yom Kippur” war. Saudi Arabia and the UAE had halted oil supplies to countries that supported Israel against the Arabs. Keen observers are saying that this is a “new oil war” against the US and marks a new era in Saudi-American relations.
Finally, it appears as if the Arabs are breaking the self-imposed shackles of Western hegemony and charting their own path in diplomacy and international trade. This churn in geopolitics might change the Middle East and the entire world altogether. Let us hope these events are propitious signs and not ominous.