U.S. and OPEC: Russian Oil Price Cap Tensions

The Group of Seven's (G7) measures to limit Russian oil exports at an artificially low price will not be mirrored against OPEC producers, whose intentions to reduce output have angered consumer nations. The Organization of the Petroleum Exporting Countries (OPEC) has been reassured by Washington over the limits to the scope of its objectives. These remarks may help to defuse a dispute that has erupted between the United States and Saudi Arabia, the world's largest oil exporter and the de facto leader of OPEC. The United States has concerns that Saudi Arabia and Russia are working together to starve markets of supplies just as a worldwide recession appears to be on the horizon.

Producers and consumers of oil have been at odds over pricing and OPEC's decision to reduce production is attributed in part to the group's displeasure with a proposed price ceiling. To stabilize markets and reduce volatility, OPEC+, the producing bloc's grouping with allies including Russia, said last week that it will cut output by 2 million barrels per day.

Several OPEC nations' inability to fulfill their current output levels has prompted Saudi Arabia to estimate that the true drop will be about 1 million barrels per day (bpd).

Analysis conducted by the United States indicated the reduction might have been postponed until the next OPEC meeting in November, after the midterm elections in the United States. Despite their decades-long energy-for-security cooperation, ties between the two countries have recently been increasingly tense. U.S. Deputy Treasury Secretary Wally Adeyemo stated last week that OPEC officials did not mention the Russian oil price restriction during their meetings with the United States. Saudi Arabia, which on Sunday denied it was assisting Moscow in its invasion of Ukraine, was accused by the United States of having arranged the cut to increase Russia's earnings. Saudi Arabia stated that Washington's desire to extend the reduction by a month would have had severe economic effects, dismissing criticism of an OPEC+ decision to decrease its oil output target last week as not founded on facts. Following the action taken by OPEC+, President Biden stated there will be repercussions for the United States' relationship with Saudi Arabia.

The December 5 price cap is in response to Russia's invasion of Ukraine and will not apply to other exporters whose efforts to reduce output cause price increases. There is no indication that the new sanctions would lead to the formation of a buyer's cartel to mitigate the effects of OPEC's policy on the oil market. Last week, a group of consumer countries represented by the Paris-based International Energy Agency warned that higher prices caused by the OPEC+ reduction might trigger a worldwide economic slump. U.S. Treasury official, on the other hand, thought the cut would have a minimal effect on prices, stating that it may take a $30–$40 price spike or a production drop 10 times the magnitude of the actual decrease to OPEC+ output of roughly 900,000 bpd to cause a recession.

While the G7 is eager to deprive Moscow of wartime profits, they are trying to prevent a global supply shock that may lead to higher prices and damage their own population at a time when global recession concerns are at an all-time high. In September, G7 ministers reaffirmed their support for creating a buyer's cartel. Critical details, such as the level of the cap that would be imposed per barrel, was set depending on a range of technical inputs that were agreed upon by the coalition of nations implementing it. The price cap proposal was agreed upon by the G7 nations late last month, but it ran into conflict with the European Union's more stronger sanctions on Russian supplies that were adopted in June. Despite the EU's agreement to the cap this month, uncertainty about the plan has increased in the oil sector with only six weeks until the deadline.