OPEC+ Oil Cut: The Economic and Geopolitical Importance

The Saudi Arabia-led Organization of the Petroleum Exporting Countries (OPEC) and its allies – referred to as OPEC+– announced cuts in oil production on Sunday, April 2, 2023. A meeting of the Joint Ministerial Monitoring Committee (JMMC) was held on April 3, 2023).

The total oil cuts are estimated at 1.16 million Barrels Per day (bpd). While Saudi Arabia said it would cut oil production by 5,000,00 bpd, from May 2023 till the end of 2023, Russia had already announced earlier that it would be reducing its oil production. Other countries which announced oil cuts include; Iraq which will cut oil production by 2,11,000 bpd, UAE will reduce oil production by 1,44,000 bpd. Gulf nations, other than UAE and Saudi Arabia, which announced oil production cuts were Kuwait and Oman.

Saudi Arabia dubbed the decision to reduce oil production as “a precautionary measure aimed at supporting the stability of the oil market.” 

Earlier announcement of oil cuts 

US President Joe Biden during his Middle East visit in July 2022, included Saudi Arabia along with Israel, to put US relations with Saudi Arabia back on track which had witnessed a downward slope in the initial tenure of his presidency. The US President had expected that the Saudis would give in to the US demand of increasing oil output. In October 2022 however, OPEC+ had decided to reduce oil production by 2 million barrels per day. 

While the National Security Council (NSC) of the US was critical of the decision, it categorically stated that “…prices have come down significantly since last year, more than $1.50 per gallon from their peak last summer.”

The NSC also said that it would continue to work closely with stakeholders to ensure lower prices for US consumers

US Secretary of Treasury, Janet Yellen while commenting on the OPEC+ decision said: “I think it’s a very unconstructive act at this time when it’s important to try to hold energy prices down.”

Global Oil prices have been steadily coming down since last year. After the disruption in oil supply from Iraq, prices moved up from 70$ to 80$ a barrel, and the announcement by OPEC+ saw brent crude rising to around $85 a barren. 

This decision according to many observers was driven by the Saudis wanting to keep oil prices high, so that they are able to fund some of the big ticket projects linked to the Crown Prince Mohammed Bin Salman’s (MBS) agenda referred to as Vision 2030.

Russia which is facing serious economic challenges in the aftermath of the Russia-Ukraine war, could also benefit since high oil prices will enable it to fund the war.

Timing of the announcement 

The decision comes weeks after the collapse of the Silicon Valley Bank (SVB) in the US and the banking sector witnessed a global dip in stock prices. The Saudi National Bank  which had acquired a  9.9% stake in Credit Suisse had to face a loss of 80%. UBS group had taken over Credit Suisse for $3.23 billion.

While there are strong economic implications of the OPEC+ announcement, it is also important to look at this decision in the context of geopolitics. It comes at a time when ties between Saudi Arabia and US are facing serious strains, while Riyadh’s ties with both Beijing and Moscow have warmed up. The announcement regarding oil cuts comes weeks after the China brokered Saudi-Iran agreement, which has been cited as a strong example of the US losing its leverage in Middle East at the cost of China. The recent announcement of OPEC+ clearly indicates that Saudi ties with Russia have strengthened. It would also be pertinent to point out, that in the aftermath of the Russia-Ukraine war not just Saudi Arabia but many other middle powers, including Indonesia and India, have sought to balance their relations between US and Russia. New Delhi’s decision to purchase oil from Russia at discounted prices has been lauded by many quarters and the US has not publicly criticized India’s decision saying that it understands India’s domestic economic priorities.

The decision of OPEC+ needs to be viewed not merely in the context of global oil prices, but also the changing global geopolitical architecture. It clearly underscores the changes in Saudi Arabia’s foreign policy which will seek to give precedence to its interests, and not toe the US line (many other countries are facing a similar predicament). As mentioned earlier, an important propelling factor for this OPEC+ announcement was Saudi Arabia’s domestic economics. It remains to be seen if the OPEC+ announcement will lead to further strains between Saudi Arabia and  the US.

[Photo by Priwo, via Wikimedia Commons]

The views and opinions expressed in this article are those of the author.

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