This week, OPEC+ made a decision unprecedented in its history and the history of OPEC. The extended cartel approved production cuts of 2 million bpd at a time of steady demand, tight supply, and runway inflation in the world’s biggest economies. More significantly, perhaps, OPEC+ made this decision despite Washington’s numerous attempts to change the mind of the cartel leaders, notably Saudi Arabia and the UAE.
Just a day before the OPEC+ meeting, CNN reported that all available human resources in the administration had been mobilized, with the White House “having a spasm and panicking,” per one unnamed official.
Top officials such as Amos Hochstein and Janet Yellen had been tasked with talking the Saudis and the Emiratis out of a production cut. Talking points included a not too thinly veiled threat of reputational and foreign relations damage: “There is great political risk to your reputation and relations with the United States and the west if you move forward.” Yet the Saudis and the Emiratis did just that. They went forward.
Commentators were quick to note the move was a slap in the face of the United States and the collective West. It is the West that needs cheaper oil the most right now as the European Union embargoed Russian crude and fuels and the U.S. Democratic administration needs cheap gasoline ahead of the midterms to have a chance of retaining its party majority in Congress, however slim.
In a symbolic affirmation of a major geopolitical alignment change, the Saudi energy minister, Prince Abdulaziz bin Salman, accused Reuters of bad reporting and refused to answer questions from the agency at a news conference after the OPEC+ meeting and pretty much waved off suggestions by CNBC’s Hadley Gamble that OPEC+ was siding with Russia and weaponizing oil at a time when the global economy needed it.
In short, OPEC+ bluntly demonstrated it can do whatever it feels it needs to do to protect its own interest, even if this means going against the interests of its traditional allies, including its biggest one.
As Bloomberg’s Javier Blas put it in a commentary piece after the meeting, “The US and its Western allies need to pay attention. For the first time in recent energy history, Washington, London, Paris and Berlin don’t have a single ally inside the OPEC+ group.”
One might argue that this tectonic change in geopolitics is more important for the future of the world than the war in Ukraine, although these are certainly not isolated from each other.
Saudi Arabia has already stated its desire to join the BRICS alliance in what can hardly be interpreted as anything less than a declaration of support for the Russia/China bloc. Its closest ally at home, the UAE, tends to follow Riyadh’s foreign policy, so it is on board with this distancing from the West and forging closing relations with a symbolic East and a very literal group that represents a substantial portion of global GDP.
So, the world’s largest oil producers after the U.S. are turning their backs on their once geopolitical friends and siding with the enemy, to put things bluntly and simply. That talking point for the Biden top team cited above may sound like a threat, but what specific form would that threat take?
So far, the response has been quite general. In an official statement, President Biden said on Wednesday that he was “disappointed by the shortsighted decision by OPEC+ to cut production quotas” and threatened to consider moves to “reduce OPEC’s control over energy prices.”
The only way to reduce OPEC’s control over energy prices would be to boost domestic production, but this is something Biden has vowed he will not do and even pledged to prevent. This, however, would leave even fewer options on the response table, such as the end of arms deliveries to Riyadh.
Indeed, some congressional Democrats have already called for a sharp reduction of arms deliveries to the Kingdom in response to the OPEC+ output reduction decision. Yet such a move would make the military-industrial complex quite unhappy with the White House, which would make such a decision difficult to sell.
Besides suspending deliveries of weapons to Saudi Arabia, there is the political pressure campaign approach, with some on social networks already joking that it’s only a matter of time before Washington begins noticing human rights abuse and the absence of democracy in the desert Kingdom.
Other than this, there is little Washington can do to “punish” Riyadh—OPEC’s leader and co-leader of OPEC+ along with Moscow—for the slap in the face. Sanctions would hardly be a smart decision given Saudi Arabia’s weight as an oil producer at a time when oil supply is short in the West. Coaxing didn’t work and seems unlikely to work going forward, at least for the time being.
It is beginning to look increasingly wise to sit this one out to avoid risking an even greater alienation with former allies that can do a lot of damage to the U.S. economy—and it won’t be reputational damage. After all, Saudi Arabia is the United States’ third-largest foreign supplier of crude.
Irina Slav for Oilprice.com
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