Relations between the United States and Saudi Arabia reached a new low Wednesday, as Saudi-led OPEC voted to slash oil production amid a global run-up in energy prices.
The decision represented a win for Russia, which coordinates oil policy with OPEC and is seeking to bolster the value of its exports. It also comes a month before the midterm elections in the United States, where high energy prices are likely to be a central issue. Biden administration officials expressed disappointment in the move and signaled they were open to working with Congress on legislation that would enable the government to bring an antitrust suit against the oil cartel.
Two members of Congress said they would introduce legislation to remove U.S. troops and military equipment from the country.
“This is going to lead a lot of people in the U.S. to reevaluate the U.S.-Saudi relationship,” said Ben Cahill, a senior fellow at the Center for Strategic and International Studies. “The assumptions have changed.”
Analysts said the moves underscored the depths of the gulf between Washington and Riyadh. The two capitals’ interests were once linked: Saudi Arabia exported barrels of oil around the world in exchange for U.S. security guarantees. But recent years have flipped the relationship on its head, and relations have been strained by differences over the Arab Spring, the killing of Jamal Khashoggi and conflicting approaches to a spiraling energy crisis.
“The market has moved on, things have changed a lot,” Cahill said. “Saudi Arabia has a much broader array of trade partnerships and interests. Its relationships in Asia have become a lot more important, and I think the U.S. feels a lot more liberated to go its own way and not depend on Gulf oil production.”
Analysts said OPEC’s move to slash production appeared to be a response to a looming European embargo on Russian oil exports, which is set to go into effect in December, as well as efforts by the Biden administration and its European allies to place a price cap on Russian crude. Attempts by oil-consuming countries to try and set the price of oil represents a direct threat to OPEC’s ability to direct oil markets, they said.
The move will slash OPEC oil production by 2 million barrels a day, or about 2 percent of global oil production. Most analysts expected the actual cuts to be more muted, as most OPEC nations are already failing to meet their stated production targets. Goldman Sachs, in a note to clients, said it expected the cut would result in production falling 400,000 to 600,000 barrels a day below previously projected levels. ClearView Energy Partners estimated the actual cuts at just shy of 1 million barrels per day.
Oil prices have declined since the summer, when average national gasoline prices eclipsed $5 per gallon. They had fallen steadily in recent months, before climbing slightly last week.
OPEC’s decision will likely put further upward pressure on oil prices, analysts said. Petroleum inventories in the rich nations making up the Organisation for Economic Co-Operation and Development are 8 percent below the five-year average leading up to the pandemic, ClearView said, citing International Energy Agency figures.
“Historically, OPEC has often cut production in the face of weakening demand, yet it has never implemented a cut in such a tight market, with inventories at historically low levels,” Goldman analysts wrote.
Roger Diwan, an analyst who tracks oil markets at IHS Markit, said OPEC had an economic rationale for cutting production amid rising interest rates in the United States, sky-high energy prices in Europe and mounting fears of a global recession. But the manner of the announcement pointed to a broader geopolitical message, he said.
OPEC has met virtually since the onset of the pandemic. But the cartel chose to make Wednesday’s announcement during an in-person meeting in Vienna featuring Russian Deputy Prime Minister Alexander Novak. Russia has been shunned in Europe since its invasion of Ukraine, with the European Union seeking to slash its reliance on Russian energy exports.
“From a market management, the technical part, it is not justified to go that big at this time when you’re 30 days away from a big supply shock because we don’t know the impact of the E.U. oil embargo,” Diwan said. “They wanted that political perception.”
He called Russia “an actor, not a bystander” in the decision, saying Moscow likely agreed to continue coordinating its oil production with OPEC in exchange for the production cuts.
Saudi Arabia also appeared to be motivated by its disagreements with the Biden administration, which date back to the Obama administration’s support for protesters in the Arab Spring. The Saudis have only grown frostier since, with U.S. intelligence agencies concluding that Saudi Crown Prince Mohammed bin Salman ordered the killing of Khashoggi, a Washington Post journalist.
Biden traveled to Saudi Arabia over the summer as part of an attempt to convince bin Salman to increase production and ease oil prices. He returned empty-handed.
Diwan said the timing of OPEC’s announcement underscored apprehension about Biden in Riyadh.
“To do that a month before the election in the U.S. is not innocent,” he said. “There is a political game being played and it’s overt now.”
Biden administration officials were quick to voice their displeasure with the OPEC decision.
In a joint statement, national security adviser Jake Sullivan and National Economic Council Director Brian Deese said Biden “is disappointed by the shortsighted decision.” They pledged to continue releases from the Strategic Petroleum Reserve, with another 10 million barrels in November and said the administration will “consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices.”
Many analysts interpreted the statement as a warning the administration could support a NOPEC bill floated in Congress, which would enable the attorney general to sue the oil cartel on antitrust grounds. In a note, ClearView said the bill could attract enough support to overcome a filibuster. While the administration would not be required to sue OPEC if the bill became law, it’s mere existence would constitute a “dramatic intervention” and could prompt OPEC to reconsider the cuts and lead to a dramatic sell-off in oil markets, the research firm said.
“At minimum we would suggest that even brandishing NOPEC goes well past ‘disappointment,'” ClearView wrote.
OPEC officials framed their decision as an attempt to get ahead of a potential recession and provide long-term certainty needed to drive investment in oil markets. Prince Abdulaziz bin Salman, the Saudi minister of energy, bristled at a question about whether OPEC was weaponizing oil prices.
“Very provocative question,” the Saudi minister told reporters during a press conference, in comments reported by POLITICO. “Show me where is the act of belligerence.”
The short-term fight over OPEC production comes as the United States and Europe ponder a long-term shift away from fossil fuels. Those efforts are viewed as an existential threat by OPEC members, who use oil revenues to power their economy and fill government coffers, analysts said.
OPEC countries have responded to the threat in different ways. The United Arab Emirates has sought to increase output as part of a strategy to raise money for a transition to cleaner energy sources. Saudi Arabia’s response has been more limited, analysts said, though the kingdom is exploring critical minerals needed for the energy transition.
The challenge for Riyadh is that cutting supply could raise energy prices and increase the incentive to shift to alternatives, Diwan said. That is especially true in emerging markets, which are among OPEC’s most important markets, he said.
“If they want to preserve the long-term future of oil, you need to let these countries increase the long-term demand for oil,” Diwan said. “If you accelerate the technology shift away from oil and reduce the cost of that shift, all the world will be able to afford it — not just the rich countries.”
This story also appears in Climatewire.