The oil needs of the West are no longer a primary concern
OPEC+ announced on Wednesday that it would make production cuts of 2 million barrels per day, which is roughly equivalent to 2% of global supply. The decision is monumental. It shows that a new type of world is emerging in the wake of the war in Ukraine, and one that does not revolve around the West. As White House spokesperson Karin Jean-Pierre said this week: “It’s clear that Opec+ is aligning with Russia.”
The reality is that the decision to cut production is completely rational from the point-of-view of OPEC+. With interest rates rising quickly and growth slowing, Europe, which makes up around 19% of total oil consumption, is almost certainly facing down a serious recession next year. There is also a risk that the United States and Canada will fall into recession at the same time — these countries make up a further 27% of total consumption.
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OPEC+ does not want to see history repeat itself. In the 2008 recession, European oil prices fell from just over $140 a barrel to just under $40 a barrel — a massive decline of over 71%. So, the likely reason that they are cutting production is to try to firm up the market in case there is economic turbulence ahead.
It is not OPEC+’s decision that is odd, then, so much as it is the American response. Jean-Pierre’s statement is somewhat understandable given that President Biden was aggressively lobbying the cartel to lower oil prices, presumably so he could have claimed to lower oil prices in the run-up to the midterms this November. Yet it still comes across as impotent, even pathetic.
Historically, American presidents have been able to lobby the Saudis to lower oil prices when it was so required. When Saudis flooded the market with oil in 2014, many were quick to point to the work of the White House behind the scenes. Certainly, the timing lined up in a way that suggested it. By the time the midterms rolled around that year on November 4th, the oil price had fallen around 28% from its peak in June.
What we are seeing emerge out of this week’s OPEC+ meeting is that the Saudis are no longer willing to play ball with the Americans. This is not surprising because Saudi Arabia is rumoured to be joining the BRICS alliance next year. The Saudis are rapidly moving away from the Western sphere of interest and are instead aligning with the emergent developing economies led by Russia and China.
This week’s OPEC+ meeting likely signals that future oil prices will be set in line with the needs of the BRICS+ countries, rather than with the needs of the West. Unless, that is, the West reconsiders its approach to diplomacy and how it conducts itself with these emerging economies. But the foot-stomping by the White House signals that they have not even begun to think through such matters. As winter nears, this could prove fatal.