The OPEC+ decision to cut its production quota by 2 million bpd has placed the Biden Administration between a rock and a hard place, with oil prices climbing ahead of the mid-terms and very few viable options to counter it.
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Friday, October 7th, 2022
Any doubt about the cohesion of OPEC+ was put to bed this week as the group's summit in Vienna ended with a 2 million bpd production cut. This cut appears to have achieved exactly what the participating members wanted, namely higher oil prices. It appears that fears of a global economic slowdown have taken a back seat to oil market fundamentals and geopolitical uncertainty. Saudi Arabia, the country that will spearhead the production cuts (Russia is already producing at its decreased target), has put the Biden Administration between a rock and a hard place only several weeks before the midterm elections. Confronted with the prospect of rising gasoline prices, the White House needs to react swiftly if it does not want to be seen as weak.
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Russians Want to Build Up Own Alumina Plants. According to media reports, the Russian government wants to build up its own capacity of alumina, used in aluminum production, as the country is 65% reliant on imports from China after the shutting of the Ukrainian and Australian markets.
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By Tom Kool for Oilprice.com
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Politically it highlights President Biden’s failure to persuade Saudi-led OPEC+ to increase production coming just before the US Congressional elections which the Democrats, the president’s party, are expected to lose and this could potentially mean that President Biden could end his political career as a one-term president.
Logistically, the United States will neither be able to offset the OPEC+ cut from US shale oil production nor can other producers from outside OPEC+ do so either. It can withdraw more oil from the US Strategic petroleum reserve (SPR). This President Biden has already done when he directed the US Department of Energy (DoE) to release additional 10 million barrels (mb). This raises the total of released SPR oil to 250 mb and reduces the volume of oil in the SPR to 417 mb, the lowest since 1984. Furthermore, the DoE will find it virtually impossible to replace previous SPR releases because of the tightness of the market.
Economically, the OPEC+ cut will be reflected in rising gasoline prices in the US. Any rise in Brent crude would exacerbate inflation in the US and force the US Federal Bank to raise the rate of interest steeper thus causing the US economy to shrink further and making recession inevitable.
Geopolitically, the refusal by Saudi Arabia to respond to President Biden’s repeated calls to it to increase production signifies a drastic change in the relations between the US and Saudi Arabia and growing relations with both Russia and China. Saudi Arabia senses that the World Order is already transiting from a unipolar system led by the US to a multipolar one ushered by both Russia and China and therefore it has to adapt itself to the new emerging order.
The OPEC+ cut has placed President Biden between a rock and a hard place. He needs to respond if he does not want to be seen as weak. The White House may invoke the NOPEC Bill to sue the OPEC+ for so-called cartel-like manipulation of oil prices. But this will amount to nothing for the following reasons.
1- Even if NOPEC bill becomes a law, it is unenforceable against OPEC since it isn’t a cartel. OPEC has never once tried to fix a specific price nor has ever been able to achieve this goal.
2- The second reason is that if the United States tries to sue OPEC or any of its members, the organization could stop all its oil exports to the US. NOPEC only has jurisdiction in the United States but no extraterritorial jurisdiction under international law.
3- The third reason is that if, however, the United States persists with mounting law suits against OPEC or its members, they could retaliate by withdrawing their investments and funds in the US and even replace the petrodollar with the petro-yuan. This would be the most serious retaliation against the US. Once Saudi Arabia and UAE have made the switch, the overwhelming majority of OPEC members will follow suit exactly as they did in 1975 when they adopted the petrodollar. This will literally pull the rug from under the petrodollar and the US financial system it underpins.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
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