OPEC and its allies reached an agreement to significantly reduce oil production. OPEC+ is comprised of 11 allies led by Russia in addition to the 13 members of the Organization of the Petroleum Exporting Countries (OPEC). Because OPEC+ fell approximately 3.6 million barrels per day short of its output target in August, the reductions in production that were announced last week are based on current baseline statistics, indicating the reductions will be less severe than originally planned.
The de-facto leader of OPEC, Saudi Arabia, stated that a reduction in production of 2 million barrels per day (bpd) was essential in order to respond to increasing interest rates in the West and a weakening global economy. On Wednesday, blame was passed back and forth between OPEC+ and the West as the group cut supplies by a significant 2% of the world supply in a market that was already tight. The United States and other western nations have imposed sanctions on many countries, including Russia, Venezuela, and Iran, which has led to a significant decrease in production. Additionally, other producing nations, like Nigeria and Angola, experienced difficulties with their output.
This move, however, which limits supply in an already constrained market, caused one of OPEC's most significant conflicts with the West, as the United States administration criticized the unexpected decision as being shortsighted. In the case of the United States, this deal would limit supply in a market that is already constricted, which will increase the likelihood of higher gasoline prices only a few weeks before the midterm elections in November. During the next elections, the Democrats' primary objective will be to defend their hold on both the House of Representatives and the Senate. When questioned about the decision made by OPEC, President Biden responded to reporters at the White House by saying that his administration is looking at what options are available. This week, President Biden issued a call to action to both his administration and Congress, urging them to investigate potential avenues for increasing energy output in the United States and lowering Russia’s hold on energy costs.
The U.S. Administration will continue to evaluate whether additional strategic oil supplies should be released in order to bring prices down. Officials from the United States have stated that one of the reasons their country wants to see lower oil prices is to reduce the amount of money Moscow earns from its oil sales. Earlier this year, President Biden made a trip to Riyadh, but he was unable to gain any concrete cooperation agreements on the energy front while there. As a result of Saudi Arabia's failure to denounce Russia's activities in Ukraine, relations between the countries have become even more tense.
In July, President Biden traveled to Saudi Arabia, but returned home without an agreement for the OPEC+ group to assist bring down the price of gasoline, which is a significant political headache for him back home. When asked if he had any regrets about going to Saudi Arabia, President Joe Biden responded that the trip was not primarily about oil. The president has carried the political burden of high inflation, making the recent decline in prices a significant success for him. The White House has retaliated strongly against OPEC+ with the Biden administration blasting the move as being shortsighted. Energy analysts are of the opinion that the deep production cuts could yet backfire for OPEC kingpin and U.S. ally Saudi Arabia. This is especially the case due to President Biden hinting that Congress would soon seek to rein in the influence that the Middle East-dominated group has over energy prices.
This week, President Biden says there will be "consequences" for Saudi Arabia, and the administration is reevaluating the relationship considering the oil production cut. Democratic lawmakers have called for a halt to all U.S. cooperation with the Saudis. U.S.-led attempts to make Russia's involvement in the Ukraine conflict economically unsustainable have been hampered by the production cuts. It also risks saddling Biden and Democrats with rising gasoline prices ahead of midterm elections. It is unclear, however, how far the President will go to demonstrate his discontent with the Saudis, a necessary but problematic Middle Eastern ally.
The West has accused Russia of using energy as a weapon, and this accusation comes at a time when increasing gas prices and a mad dash to find alternatives has created a crisis in Europe that might result in rationing of gas and electricity during the coming winter. Russia stands to profit the most from the unexpected significant oil production cutbacks agreed to this week, while the supply to the West, which is already suffering from record energy prices, is poised to tighten. Moscow will not need to cut production as it already produces well below the agreed-upon target. Instead, it will be able to reap the benefits of a higher price for oil, which will be achieved through production reductions carried out primarily by OPEC Gulf producers. According to Ole Hansen of Saxo bank, the winner is Russia, while the loser is the global consumer who does not need increased energy costs going into an economic slump, and a projected cold winter.