Half a century ago, the Yom Kippur War between Israel and the Arab states put a new cartel of oil producers at the center of world politics. The Organization of Arab Petroleum Exporting Countries, including Saudi Arabia and the United Arab Emirates, cut off oil supplies to Western countries that supported Israel. It was the first global oil shock.
On Wednesday, the Jewish holy day of Yom Kippur, Saudi Arabia and its oil allies – which now include Russia in the OPEC+ group – moved again to change the world energy order.
Their decision to cut 2 million barrels a day from production targets, or 2 percent of global supply, may sound modest. But this, while Brent crude traded in the high $90s a barrel – almost twice its long-term historical price – is a threat to a global economy dogged by inflation and growing consumer anxiety about energy prices and shortages. And it marks a new and perhaps dangerous rift between producer and consumer countries, especially between the US and Saudi Arabia.
The timing of the cuts was particularly telling for the US, coming just two and a half months after President Joe Biden shook hands with Saudi Crown Prince Mohammed bin Salman in Jeddah and five weeks before November’s midterm elections. Days earlier, White House envoys had traveled to Saudi Arabia to plead with the kingdom not to cut.
Instead, Prince Mohammed’s half-brother, Energy Minister Prince Abdulaziz bin Salman, sealed the supply cut deal at OPEC’s Helferstorferstrasse headquarters in Vienna. He was accompanied by Vladimir Putin’s Deputy Prime Minister Alexander Novak, just days after he was slapped with US sanctions.
Roger Divan, a veteran OPEC watcher at S&P Global Commodity Insight, said in a note that the cuts meant “weaponizing oil” and suggested the timing and location of the meeting was a deliberate signal from the cartel.
“The presence of Russia’s deputy prime minister, who is under US sanctions, to discuss tightening oil supplies heading into a winter in which Russia has already weaponized its gas exports to Europe sends a clear message,” Divan said. “Saudi Arabia’s Hostile Path Will Further Distort Oil Price Risk.”
For Saudi Arabia, which has long depended on US military support as part of a security-energy alliance that has endured through two Gulf wars and the 9/11 attacks, it underscores a new confidence that it can buck American pressure and act in their own commercial and diplomatic interests.
As the Biden administration prepared for the decision to cut, the reaction in Washington was still shocked by the breach in the alliance.
President Biden said he was “disappointed” and would look for “alternatives” to increase supplies. The White House announced that OPEC had “agreed with Russia” even as Moscow escalated its offensive against Ukraine, and said it would consider releasing more oil from its strategic oil reserve.
The OPEC+ cuts came two and a half months after President Joe Biden exchanged fists with Saudi Crown Prince Mohammed bin Salman in Jeddah © Bandar Aljalud/Royal Palace of Saudi Arabia/AP
Indeed, OPEC and Western oil importers have been at loggerheads for years as concerns about global warming and energy security have prompted governments around the world to curb fossil fuel use, an environmental necessity that many oil producers have seen as an attack on their livelihoods.
The election of Biden, with his campaign promise to give up oil and make Saudi Arabia a “pariah” for killing Jamal Khashoggi, only deepened the rift. But the invasion of Ukraine by Russia, an OPEC+ ally of Saudi Arabia since 2016, has erased all norms in the energy world.
The battle for control of the oil market – and even the future of the energy industry itself – is now at hand.
Targeting the “buyer’s cartel”
OPEC officials say the Biden administration fired the opening salvo with a promise to “transition off oil” and usher in a new era of clean energy, while leaning on the group to keep oil prices low.
According to OPEC, Washington has also begun to interfere in their market. The decision by the Biden administration to begin releasing crude oil from its emergency stockpile last year to ease prices worried OPEC members. They believed they were following a measured plan to gradually restore oil supplies, reduced as the global economy recovers from the pandemic.
But Saudi Arabia’s oil alliance with Russia was always going to create tension after the invasion of Ukraine.
Washington’s plan to impose a price cap on Russian crude exports – an attempt to cut the Kremlin’s oil revenue without hampering its inflows when tougher EU sanctions kick in in December – has raised alarm among OPEC producers .
They fear the measure could be used against them in the future, people familiar with the group’s discussions said, putting control of the oil market back in the hands of wealthy consumers.
The U.S. says the cap will not be used more widely, and a person familiar with the administration’s plan says the administration has had “constructive” talks with OPEC nations.
Opec+’s decision to cut output “serves a message that the producer alliance will resist any attempts by a ‘cartel of buyers’ to lower the price of oil,” analysts at JPMorgan said.
Whether because of the price cap or not, the drive to keep oil prices high was critical to the decision. Suhail Al Mazrouei, the UAE’s energy minister, said OPEC had acted to ensure producers continued to invest in new oil supplies.
“If we don’t do that, then . . .[production]will fall off a cliff,” he told reporters in Vienna. “We are concerned about the lack of investment.”
Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman, center, took part in discussions to finalize the OPEC+ deal this week in Vienna © Akos Stiller/Bloomberg
That argument is likely to find little sympathy in Western capitals, whose leaders accuse their old Gulf allies of being happy to profit from Russia’s invasion of Ukraine while thwarting efforts to starve Moscow of funds.
Western governments have also pointed to energy costs since the invasion of Ukraine as a major force behind rising inflation — “Putin’s price gouging,” as Biden put it. Gulf ministers have repeatedly refused to acknowledge that the recession they feared would collapse oil prices was caused by their Russian partner after it invaded Ukraine and cut natural gas supplies to Europe.
“In Europe they have their own history, in Russia they have their own history,” Mazruei said. “We cannot side with this side or that side.”
Kuwaiti OPEC Secretary General Haitham Al Ghais linked the decision to cut to energy supply worries facing global consumers, although he did not mention Moscow’s energy war against Europe. “Everything has a price, energy security has a price,” Geiss said.
Back in Washington, Amos Hochstein, Biden’s global energy adviser and one of the envoys involved in months of shuttle diplomacy with Saudi Arabia, suggested that one of the administration’s responses would be to seek more domestic oil production.
“We will work with our US allies to increase production and make sure we have refining capacity,” he said in a televised interview after the OPEC+ meeting. “Over the last few months, we’ve had conversations with management at almost every major oil producer in the U.S., saying ‘what do you need to boost production?'” he added.
But it could also be difficult for the Biden administration. The main US concern about inadequate short-term oil supplies is the end of the era of cheap and rapid supply growth from the country’s own shale formations.
Investors have refused to sanction the debt-fueled drilling that in previous years led to a surge in US supply that eroded OPEC’s market share. The Biden administration also initially tried to limit more fracking and drilling on federal lands. Meanwhile, the release of oil from the Strategic Petroleum Reserve left inventories at their lowest level since 1984.
“Gone are the days of rising production by millions of barrels per day [in the US]says Amrita Sen of Energy Aspects, an energy consulting firm. “It gives OPEC a lot more freedom because it doesn’t have to fear a sudden surge in shale.”
“We no longer take orders from Washington”
For some commentators in the Persian Gulf, the energy crisis has strengthened the region’s importance to global markets.
“At this point, everybody needs Gulf oil, everybody needs Saudi Arabia and the UAE on board,” said Abdulkhalek Abdullah, a professor of politics at the emirate. “Some in Washington definitely don’t realize there’s a new Gulf and we’re no longer taking orders from Washington.”
The presence of Russian Deputy Prime Minister Alexander Novak, pictured, to discuss oil supply tightening in Vienna sent a clear message, says Roger Divan of S&P Global Commodity Insight © Vladmir Simicek/AFP/Getty Images
While the Gulf states exude new confidence, absolute monarchies have also grown less patient with what they see as US unreliability as a partner in the region.
Riyadh has increasingly complained about what it sees as unpredictable US policy – including towards its arch-regional rival Iran – and has expressed concern that Washington has not provided the level of security it wants despite decades of US arms sales.
“They can cite 20 years of what they see as American helplessness and that America is not really the source of security and stability in the region,” said Stephen Cook, a senior fellow at the Council on Foreign Relations. “They really believe they are the center of the universe right now and everyone should come to…
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