Now that the main Arab producers have supported Russia’s decision to reduce oil production, M.K. Bhadrakumar says the Biden administration is left with limited options in responding to the surprise move.
OPEC headquarters in Vienna. (Vincent Eisfeld, CC BY-SA 4.0, Wikimedia Commons)
By MK Bhadrakumar
Peoples Dispatch
The shock oil production cuts from May outlined by the OPEC+ on Sunday essentially means that eight key OPEC countries decided to join hands with Russia to reduce oil production, signaling that OPEC and OPEC+ are now back in control of the oil market.
No single oil producing country is acting as the Pied Piper here. The great beauty about it is that Saudi Arabia and seven other major OPEC countries have unexpectedly decided to support Russia’s efforts and unilaterally reduce production.
While the eight OPEC countries are talking about a reduction of one million barrels a day from May to the end of the year, Russia will extend for the same period its voluntary adjustment, which started in March, by 500,000 barrels.
Now, add to this the production adjustments already decided by the OPEC+ previously, and the total additional voluntary production adjustments touch a whopping 1.6 million barrels a day.
What has led to this? Fundamentally, as many analysts had forewarned, the Western sanctions against Russian oil created distortions and anomalies in the oil market and upset the delicate ecosystem of supply and demand, which were compounded by the incredibly risky decision by the G7, at the behest of the U.S. Treasury, to impose a price cap on Russia’s oil sales abroad.
U.S. President Joe Biden signing an executive order adding more sanctions on Russia, Feb. 18, 2022. (White House, Erin Scott)
On top of it, the Biden administration’s provocative moves to release oil regularly from the U.S. Strategic Petroleum Reserve in attempts to micromanage the oil prices and keep them abnormally low in the interests of the American consumer as well as to keep the inflationary pressures under check turned out to be an affront to the oil-producing countries whose economies critically depend on income from oil exports.
The OPEC+ calls the production cuts “a precautionary measure aimed at supporting the stability of the oil market.” In the downstream of the OPEC+ decision, analysts expect the oil prices to rise in the short term and pressure on Western central banks to increase due to the possible spike in inflation.
What stands out in the OPEC+ decision is that Russia’s decision to reduce oil production by the end of the year has been unanimously supported by the main Arab producers. Independent but time-coordinated statements were made by Saudi Arabia, the U.A.E., Kuwait, Iraq, Algeria, Oman and Kazakhstan, while Russia confirmed its intention to extend until the end of the year its own production reduction.
Significantly, these statements have been made precisely by those largest oil producers in OPEC, who have a record of fully utilizing their existing quota. Put differently, the reduction in production is going to be real, not just on paper.
Banking Crisis in US & Europe
Credit Suisse, Paradeplatz in Zurich, 2019. (Ank Kumar, CC BY-SA 4.0, Wikimedia Commons)
Partly at least, the banking crisis in the U.S. and Europe prompted the OPEC+ to intervene. Although Washington will downplay it, in March, Brent oil prices fell to $70 per barrel for the first time since 2021 amid the bankruptcy of several banks in the U.S. and the near-death experience of Credit Suisse, one of the largest banks in Switzerland. The events sparked concern about the stability of the Western banking system and fear of a recession that would affect oil demand.
There is every likelihood that tensions may increase between the U.S. and Saudi Arabia as higher oil prices will push inflation and make it even more difficult for the U.S. Federal Reserve to find a balance between raising the key rate and maintaining financial and economic stability.
Equally, the Biden administration must be furious that practical cooperation is continuing between Russia and the OPEC countries, especially Saudi Arabia, despite the West’s price cap on Russian oil and Moscow’s decision last month to unilaterally cut production.
The Biden administration has only a limited range of options to respond to the OPEC+’s surprise move: one, go for another release of oil from the Strategic Petroleum Reserve; two, pressure U.S. producers to increase domestic oil output; three, back legislation that would allow the U.S. to take the dramatic step of suing OPEC nations; or, four, curb U.S. exports of gasoline and diesel.
Pumpjack outside Midland, Texas. (Eric Kounce, Public domain, Wikimedia Commons)
To be sure, the OPEC+ production cut goes against the Western demand to increase oil output even as sanctions were imposed against Russian oil and gas exports. On the other hand, the disruption in oil supplies from Russia contributed to the rising inflation in the EU countries.
The U.S. wanted the Gulf Arab states to step in and step-up oil production. But the latter did not oblige because they felt that there wasn’t enough economic activity in the West and there were clear signs of recession contrary to expectation.
Thus, as a result of the sanctions against Russia, Europe is facing the complex situation of inflation and near-recession known as stagflation. In reality, the adaptive and agile OPEC + read the situation correctly and has shown that it is willing to act ahead of the curve. At a time when the world economy is struggling to grow at a healthy rate, the demand for oil would be relatively less, and it makes sense to cut oil production to maintain the price balance.
All that the Western leaders can complain about is that the OPEC+ cut in oil output has come at an inappropriate time. But the woes of Western economies cannot be laid at the door of OPEC+ as there are inherent problems which are now coming to the surface. For instance, the large-scale protests in France against pension reform or the widespread strikes in Britain for higher wages show that there are deep structural problems in these economies, and the governments seem helpless in tackling them.
In geopolitical terms, the OPEC+ move came after a meeting between Russian Deputy Prime Minister Alexander Novak and Saudi Energy Minister Prince Abdulaziz bin Salman in Riyadh on March 16 that focused on oil market cooperation. Therefore, it is widely seen as the tightening of the bond between Russia and Saudi Arabia.
Russian President Vladimir Putin meeting with Crown Prince and Defence Minister of Saudi Arabia Mohammad bin Salman Al Saud in 2019. (Kremlin)
In fact, in May, as the largest members of OPEC join Russia in its unilateral reduction, the balance of quotas and the ratio of market shares between and amongst the participants in the OPEC + deal will return to the level set when it was concluded in April 2020.
The big question is, how Moscow might profit from the OPEC+ decision. The rise in crude oil prices particularly benefits Russia.
Simply put, the production cuts will tighten up the oil market and thus help Russia to secure better prices for the crude oil it sells.
Second, the new cuts also confirm that Russia is still an integral and important part of the group of oil producing countries, despite the Western attempts to isolate it.
Third, the consequences of Sunday’s decision are all the greater because, unlike the previous cuts by the OPEC+ group at the height of the pandemic or last October, today, the momentum for global oil demand is up, not down — what with a strong recovery by China expected.
That is to say, the surprise OPEC+ reduction further consolidates the Saudi-Russian energy alliance, by aligning their production levels, thus placing them on equal footing. It is a slap in the face for Washington.
Make no mistake, this is another signal regarding a new era where the Saudis are not afraid of the U.S. anymore, as the OPEC “leverage” is on Riyadh’s side. The Saudis are only doing what they need to do, and the White House has no say in the matter. Clearly, a recasting of the regional and global dynamics that has been set in motion lately is gathering momentum. The future of the petrodollar seems increasingly uncertain.
M.K. Bhadrakumaris a former diplomat. He was India’s ambassador to Uzbekistan and Turkey. Views are personal.
This article is from Peoples Dispatch and was originally published on Indian Punchline.
The views expressed are solely those of the author and may or may not reflect those of Consortium News.
Ues, if the US needs more oil, it will do more fracking. Yuck. That is why a lot of the US has to drink bottled water now. Property rights do not generally include mineral rights.
Yes, that is what I’m wondering- The global elites knocking the USA nation state down a few notches in it’s hegemonic powers?
Analysts don’t go back far enough.
Go back to the time of Barrack Obama. Under the Great Liberal, America developed and deployed ‘fracking’ technology to finally get at its reserves of shale oil and then Burn Baby Burn them. America did not use this new found mineral wealth to say, fund and train nurses against the possibility of a pandemic in the name of securing the nation. Nope, the Great Liberal decided to use America’s new oil to …. get Russia.
America, following the strategic wisdom of Mad Bomber McCain, that Russia was only a Gas Station with an Army, decided that if America used its new oil to drive down the price of oil, it would crush Russia, and lead to the triumph of Freedom and big parades for the heroes like the ending of all of America’s Brilliant Comic Book Plans all say will definitely happen.
Russia turned out to be more resilient than the Mad Bomber had surmised and survived the Super Mega Death Blow from the comic book heroes. But the driving down the price of oil also hit the Saudis. For a few years, the KSA actually ran a budget deficit and they had to borrow money. Their big diversification plans away from oil took a hit from lack of money.
That was the brilliant move by America that forced the KSA and Russia to have to work together on world markets to try to keep up the price of oil. That was the birth of OPEC+. At first it was shaky. The legion of Talking Heads in the West doubted that it would work, said that neither side would keep the deal. But, they found out that it did work. The leaders of the two countries found out with OPEC+ that the other could be trusted to hold to an agreed upon deal. A big surprise and contrast to anyone who’s been dealing with Americans.
Ever since, relations between KSA and USA have been much cooler. Only, the Americans don’t really notice until they start barking out orders and realize that they are not being properly obeyed … how dare they … we wrote the rules specifically to say that everyone has to follow orders. Why have a Rules Based Order if no one obeys the Rule that says Everyone Must Follow Orders.
I would be surprised if the Saudi’s ever admitted being ‘afraid’ of the Americans in the past. That would go against human nature. Humans usually are not wired that way. And especially not the sorts of alpha people who become ‘leaders’.
The world is coming to its senses. Now the USA is having a few slices of humble pie to digest. What happened? Up to now everyone bowed down but they’re not doing it any longer. Hmm. Any chance this new state of affairs might presage a divorce between the USA government and its oligarchic bosses? Go ash. What would that look like?
The Saudis are no longer afraid of the people from whom they “needed” the US to protect them.
The US bullied them, and made demands in return for that protection. But the US was not the threat they feared.
Now, the US is not really in a position to attack the Saudis, not to become the threat and so force the Saudis to do the will of the US.
The ineptitude of the Biden administration with respect to everything makes it the ideal reflection of the incoherent conglomeration of contrary interests mangled together to form the Democratic Party, a political movement that betrays its voters constantly and consistently, making it ideal for masochists. Unfortunately, the rest of us suffer as well, and not just in the US.
Again USA is the LOSER including its slave EU !Both don’t realize they’ve become second class nations without POWER!! Like Kissinger used to say if you control the OIL MARKET, You control this planet!! The politicians of USA & EU are too stupid to realize THAT!!
They also want to hurt Biden and help trump. They and Putin would love having trump back in office. Raising oil prices gives trump a trumpet.
Despite much hot air from corporate media to the contrary, the trump administration was NOT pro-Russian. The US strategic posture towards Russia was escalatory throughout trump’s term, and while trump himself may like Putin’s swaggering autocracy- this did not meaningfully translate into action to soften America’s posture. Keep in mind, the russians aren’t watching cnn or The NY Times; they’re watching US naval deployments in the Black Sea, and nato spec ops in Ukraine.
There’s no need to overlay theories of russian meddling into domestic US elections on top of an issue that has clear explicit benefits for them as they fight an expensive war.
I think you are pretending that Russia interferes in elections!!!! Putin has often claimed that whichever Party is in power in the USA, little changes!
It doesn’t matter who the US President is. Biden and his neocon friends are stupid, short-sighted, arrogant, and greedy. Everyone else on the planet sees this except for Americans in their bubble.
Economically, rise in oil prices which is actually returning to recent prices, is no more beneficial to Russia than to other producers. As oil prices are stable, they are not an inflation driver. However, while sanctions on Russia force discounts on Russian oil, the effect is that tanker ships follow longer routes, increasing consumption of tanker fuel and the transportation prices even more, so the cost for Europe are inflated, especially that prior to sanction, Europe was using products made “next door”.
However, India and indirectly Russia are indeed beneficiaries. Russian imports allowed India reduced inflation and improve trade balance, additionally, foreign-owned accounts in Indian rupees are increasing, so petro-rupees join the club of petro-dollar, petro-yuan etc. The indirect but profound benefit for Russia is that “isolating Russia” did not happen, and Western threats are increasingly whining. Through size alone, India is a trend setter, especially that it changed its position (actually, rebalanced toward prior policies, but it was not what West wanted).
In the same time, the West failed to understand the implication of the sanction policy and rhetoric, they became the clear and present danger to all OPEC countries. Oil exporters have fat and lean years so they need large reserves in foreign currencies. USA started to exploit it for blackmail with increasing boldness, and EU went along with it. What is the topmost economic and political interest of all OPEC countries is not the current price, 10 dollars less or more, but the fate of the financial reserves. The reserves of Venezuela were confiscated (stolen). Then Trump forced continuation of American military presence in Iraq by the threat of freezing 100 billion of Iraqi reserves. Then Russia. Mind you, neither Venezuela nor Iraq were “guilty” of anything. Add floating proposal to brand OPEC as criminal, and assorted criticism, justified or not, that does not make OPEC members “better” than Venezuela.
There are only two defenses for OPEC. First, solidarity, which has an implicit counter-threat of embargo in the style of 1970-ties. Second, foregoing the convenience of dollar-pound-Euro-yen financial system and diversifying payment systems and the currencies of foreign reserve. Tanzania shilling accounts will never be under confiscation threat, and perhaps they offer a better interest rate (recently accepted by KSA).
If “the future of the petrodollar seems increasingly uncertain” the future of the human race is equally uncertain. If the USA petrodollar begins to fail the USA will fight. It lives on WAR in any case, but the petrodollar is the mechanism by which it runs the USA Empire. Yes, we need the petrodollar gone. But removing the petrodollar might just remove us all. The USA would kill us all before it would surrender its petrodollar.
The whole world appears to be in dire straits, with or without the $:
“World economy entering ‘perilous phase’ with UK to perform worst in G7 this year, IMF says”
IMF chief economist Pierre-Olivier Gourinchas has said inflation is much more persistent than expected.”
I was wondering if anyone else was thinking the American war machine is still well oiled, and they will use it.
We could hope that the increased capacity of the Chinese and Russian military might deter the US…. Probably not.
The result could be nuclear. The US will destroy themselves before allowing a multipolar world.
Yes Bhadrakumar is yet again spot on with his timely analysis. It is a slap on the face OF Washington, indeed. But one has to remember that Washington, the capital that is, has multiple faces ! For example, while its political, economic and climate-change faces may be hit, its energy, financial and environmental faces would be brimming bright ! Frankly, the US fracking industry would be blowing its top with the consequent higher prices making their ventures again attractive. The internationally hedged US oil majors too may not be too perturbed. A come back ready Trump would be smiling as well !
You are quite right about the upward effects of this on the US shale gas industry. I’m surprised M.K. B. does not even register this on his radar. What this has to do with Trump though, you’ve got me scratching my head.
Oh we don’t want to get into the Trump stuff now. Thats embargoed for some time.
Can the author perhaps do an expanded report on the price which Russia is obtaining from its oil and gas from large customers such as China and India? Given that Russia has lost so many of its oil customers, the China and India must surely be using leverage to negotiate very low prices.
My personal view is very simple. I’ve said this for years. The US is the most powerful country in the world but it is not more powerful than the rest of the world. If a significant chunk of the world outside of the US and its European and Asian vassals decides to gang up on us, we are screwed.
The kicker is that we may no longer be the most powerful country in the world……
What does Biden expect when he insults people and imposes sanctions and uses a gun to get his way? After decades in public office, he has yet to learn that actions are followed by RE-action. And the people he appointed are not any better. Who is in charge in the madhouse anyway?
The people must take control in a manner we will find a way to decide. Inclusion of the predator class has proven impossible enough times and places to rule them out. That may mean civil war.
Exactly. Biden acts like a stupid gang boss, running a gangster State. Contempt for the contemptible I say, and Cracker Joe deserves it.