Oil pumping jacks, also known as “nodding donkeys”, operate in an oilfield near Neftekamsk, in the Republic of Bashkortostan, Russia, on Thursday, Nov. 19, 2020. The flaring coronavirus outbreak will be a key issue for OPEC+ when it meets at the end of the month to decide on whether to delay a planned easing of cuts early next year. Photographer: Andrey Rudakov/Bloomberg
The OPEC+ cartel has just delivered a massive snub to Western governments facing the worst energy crisis in half a century. Look past the buzzwords accompanying Wednesday’s cut in oil production — preemptive move, uncertain outlook — and it’s difficult to see the move as anything but an attack on a global economy that desperately needs the price of crude to remain subdued.
In all its history, OPEC — and its new incarnation, the OPEC+ alliance — has never curbed output so much, and so quickly, while Brent was still flirting with $100 a barrel. Triple-digit prices used to push the group into output-boost mode, not the reverse.
Breaking with tradition, OPEC+ on Wednesday announced it will reduce output by 2 million barrels a day — on paper — in November. Because so many of its members aren’t meeting their output targets, the real cut would be smaller, about 950,000 barrels per day, and shouldered mostly by Saudi Arabia, the United Arab Emirates and Kuwait.
For much of the past two years, the oil cartel has opted for a gradual, phased approach to managing supply. On Wednesday, it opted for “shock and awe” — it’s difficult to reconcile the big cut with the word moderation. OPEC+ officials offered no explanation for why the cartel needs to cut immediately and by so much, other than saying they wanted to be ahead of the curve. Has oil demand growth collapsed? Is non-OPEC supply growing fast? Are oil inventories increasing? None of these appear to be the case.
If anything, the fourth quarter looks tighter than the one just ended. Saudi Energy Minister Prince Abdulaziz bin Salman justified the move saying he couldn’t gamble with the market. By cutting so early and so quickly, OPEC+ is gambling with the global economy instead.
Riyadh and its allies also extended for a year, until the end of 2023, their alliance with Russia, the “plus” in the OPEC+ acronym. The Riyadh-Moscow alliance, which started six years ago, is becoming a permanent axis, redrawing energy geopolitics. Make no mistake, these are dangerous developments for the future of energy security.
In a world where even China has concerns and questions about Russian policy, Saudi Arabia is today one of the only sure-friends that Putin has left. It may be just pure business — an oil price that’s good for Moscow also suits Riyadh — but it increasingly looks like politics, too.
Coming four weeks before the US midterm elections, many in Washington took the unexpectedly large output cut as a personal attack on President Joseph Biden. The fact that OPEC+ hastily gathered in person in Vienna, rather than via video-conference as scheduled, reinforced that perception. The form of the meeting mattered as much as the substance. As Roger Diwan, a veteran OPEC watcher noted, it was “eerie” to observe the cartel jumping into major action on Yom Kippur, almost 49 years to the day of the start of the 1973 Arab oil embargo.
The in-person meeting allowed Alexander Novak, the Russian deputy prime minister under US sanctions, to travel to Vienna. He took the occasion to warn that Russia will stop supplying any country that accepts the G7 oil price cap. The OPEC+ cuts make the threat easier to implement, and therefore more worrying.
The oil-output cut will have two major consequences. Economically, it will keep inflation elevated for longer, forcing the Federal Reserve and every other major central bank into even more restrictive monetary policies, increasing the odds of a global recession. Politically, it’s a boost for Russian President Vladimir Putin in two ways. It channels more money to the Kremlin, which is desperate for revenue to keep its war machine in Ukraine alive and buy local support for the faltering military campaign. And it signals that Riyadh is in the Russian camp, willing to publicly snub Washington. Others in the Middle East, Africa and Asia will feel more comfortable cozying up to Russia.
Riyadh and its allies have a point about recession risks, nonetheless. The business cycle has turned. Look at plastic production, for example, which is quickly collapsing. History has taught OPEC that demand growth can weaken quickly, as it did in 1997, 2008 and in 2020.
But there are counterbalancing forces that would buy OPEC+ time before it needs to act, allowing a more gradual approach. For example, global oil inventories are well below their five-year average, and diesel stocks are very low going into winter. Supply risk also helps OPEC: European sanctions on Russian oil exports are about to kick in, amid slower-than-expected US shale production growth and the tail-end of American and European sales from their strategic petroleum reserves.
For all that OPEC+ officials complain about US monetary policy, the resulting strong dollar works in their favor. Unlike during the last big oil price collapse in 2008, when the trade-weighted value of the American currency was at a multi-decade low, the purchasing power of a barrel of oil, priced and traded in greenbacks, is now strong. That matters for Saudi Arabia, which imports 60% of the goods it buys overseas from Asia and Europe.
The US and its Western allies need to pay attention. For the first time in recent energy history, Washington, London, Paris and Berlin don’t have a single ally inside the OPEC+ group. During 1973-74, the White House could count on Iran, then still controlled by the Shah; in 1979, during the Islamic Revolution, Saudi Arabia was a helpful friend. In 1990, when Saddam Hussein invaded Kuwait, both the Saudis and the Venezuelans came to the rescue. Even in 2003, when Washington went to war in Iraq, Saudi Arabia helped.
This week, Biden officials found their urgent calls to Riyadh, Kuwait City and Abu Dhabi went largely unanswered. OPEC+ is making a mistake, but Western governments need to rethink their energy policies, too. They should be boosting all of their domestic sources, encompassing oil, gas and nuclear but also extending to renewables including wind and solar.
Energy security is as important today as it was nearly half-century ago when the Arab oil embargo started. But security starts at home.