OPEC+ = 13 OPEC cartel member nations plus ten other oil-producing countries.
I assumed, quite incorrectly, that President Biden’s sojourn in July to meet with Saudi Crown Prince Mohammed bin Salman was a pre-arranged, high-stakes quid pro quo. The Crown Prince and his fellow OPEC+ price-fixers would increase oil production, thereby keeping oil prices down, but first, President Biden had to travel to Saudi Arabia and ask (think beg).
President Biden made the trip, fist-bumping with the Prince to show the world they were still pals, and presumably formalized our request that the oil-rich kingdom keeps the oil flowing. The Biden fist-bump was returned this week with a middle finger from the Prince.
There was a lot of agenda window dressing at the July meeting, including ending America’s near-half-century peace-keeping contingent on Tiran Island and supporting Saudi Arabia against attacks from Iranian-backed Houthis in Yemen. But let’s not kid ourselves; the real purpose of the meeting was to avoid an OPEC+ oil squeeze as winter approaches amid Russia’s war against Ukraine. Oil and gas revenue, and only oil and gas revenue, keep the Russian economy afloat as the free world rushes defensive military aid to Ukraine.
In the you’re with us or against us world in which we live, the Saudis and their fellow OPEC+ price fixers have let us know in no uncertain terms where they stand.
The Saudi-OPEC+ timing was diabolically exquisite. Europe is bracing for winter, Ukraine has run circles around the Russians on the battlefield but will soon have to pause for the coming deep freeze, Russian cash reserves will swell with a massive infusion of inflated oil revenue, and in North America, gas prices may soon soar as the so-called OPEC+ artificially gooses the price of petroleum. As though to punctuate the metaphorical middle finger, the 2 million barrel-a-day production cutback will go into effect exactly one week before the most consequential mid-term elections in the lifetime of most Americans today.
Now, to be sure, the so-called OPEC+ price-fixing cartel includes many oil-producing nations besides the Saudis and the other original oil-producing member countries, including Kazakhstan, Mexico, and, surprise, Russia. However, Saudi Arabia and Crown Prince Mohammed bin Salman call the shots. Without Saudi concurrence, there would be no cut in production to goose the price of oil.
The decision to cut production, thereby raising prices, was justified as necessary “in light of the uncertainty that surrounds the global economy and oil market outlooks,” the cartel said in a press release. Let’s unpack that rather weird justification for raising the price of oil. The fact is, for a variety of reasons, the demand for crude oil has recently been steadily dropping. Barely 90 days ago, a barrel of so-called Brent crude brought $125 on the open market. This past week the same barrel was selling for $93. So, the oil producers rationalize the best way to fight declining demand is to raise prices. Huh?
Well, maybe not so crazy. Consumers have defended themselves against high oil prices by avoiding unnecessary automobile travel, and, of course, the widespread COVID restrictions for much of the past two years kept families close to home. But now winter, always cruel in much of Europe and certainly in Ukraine, assures that there will be a brisk market for fuel oil and an opportune time for the price-fixing cartel to push the cost of staying warm as high as possible.
Saudi Arabia, the driving force behind OPEC, needs petro-dollars today to support its future growth plans. The kingdom, or its princely class, understands that it can’t continue to support a lavish lifestyle simply by selling off its primary natural resource. The kingdom produces little of what is in demand elsewhere in the world other than oil, of which, by happenstance, it sits above an estimated 250 billion to 300 billion barrels. By and large, that goop increases in value over time, depending on what is happening worldwide.
For example, last April, the International Monetary Fund (IMF) increased its estimate of Saudi growth by about three percentage points simply because Russia invaded Ukraine. The Saudis didn’t have to do anything other than selling off some of their oil. The boost Saudi Arabia got from Russia’s land grab represented the greatest economic boost among all of the major economies in the world, according to the IMF.
Here’s the thing, as they say, the Saudi Arabian budget breaks even, according to the IMF, when oil sells at about $69 a barrel. As I write this column, the price of a barrel of Brent crude is trading at $94.42. That’s $1.05 more per barrel than it sold for yesterday. The Saudis intend for the price to go a lot higher when they cut production in three weeks.
Rystad Energy analyst Jorge León predicts that Brent could surpass $100 by year’s end, and the Saudi Arabian oil minister says he anticipates that the cut in oil production will continue through the end of 2023.
Meanwhile, the days of friendly fist bumps seem to be over for the time being, as The White House declared that Saudi Arabia and the cartel it controls have aligned with Russia. Already a bill has been introduced in Congress allowing the United States to sue OPEC for violating our antitrust laws.
The White House circulated talking points that referred to the prospect of a production cut as a “total disaster” and as a “hostile act.”
Bloomberg energy analyst, Javier Blas, warns the Saudi-Russia partnership “is becoming a permanent axis” that is “redrawing energy geopolitics. Saudi Arabia is, today, one of the only sure friends that Putin has left,” Blas said.
And the benefits of the partnership between Russia and Saudi Arabia increasingly appear to come at the expense of other global energy powers.
Karen Young with Columbia University’s Center on Global Energy Policy was equally ominous in her assessment of the Saudi move. “OPEC+ has the leverage as a market maker, U.S. shale does not, and at the end of the day, Russia, Saudi, and UAE are in business together.”
Professor Heather Cox Richardson of Boston College sees the OPEC move as being as much about influencing U.S. politics as energy policy. “It also appears to serve both Moscow and Riyadh’s interests in harming Democrats’ chances in the looming midterm elections,” she said. Cox may be on to something. Notwithstanding the steady drumbeat of criticism from the far right, Biden has racked up some impressive legislative accomplishments, and his management of the NATO nations’ response to Russian aggression will be well-treated by history.
The late Nobel economist Milton Friedman believed that sooner or later, all cartels break up as different members break ranks to pursue different interests. It will be interesting to see if the Russians will give up any of their OPEC+ quotas.
One administration official described the White House as “having a spasm and panicking” as it became clear that OPEC+ members were determined to cut production and raise prices. Nothing would change the cartel’s petro-dollar grab, not even a visit and a fist bump from the President of the United States.
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