Saudi Arabia and Russia, acting as leaders of the OPEC+ energy cartel, agreed on Wednesday to their first large production cut in more than two years in a bid to raise prices, countering efforts by the United States and Europe to choke off the enormous revenue that Moscow reaps from the sale of crude.
President Joe Biden and European leaders have urged more oil production to ease gasoline prices and punish Moscow for its aggression in Ukraine. Russian President Vladimir Putin has been accused of using energy as a weapon against countries opposing its invasion of Ukraine, and the optics of the decision could not be missed.
“The president is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine,” Brian Deese, the director of the National Economic Council, and Jake Sullivan, the national security adviser, said in a statement.
The cut of 2 million barrels a day represents about 2% of global oil production.
By reducing output, OPEC+ was also seeking to make a statement to energy markets about the group’s cohesion during the Ukraine war and its willingness to act quickly to defend prices, analysts say.
At a news conference after the meeting, the Saudi energy minister, Prince Abdulaziz bin Salman, said OPEC+ was acting amid signs of a downturn in the world economy that might cause demand for oil to weaken and prices to fall.
“We would rather be preemptive than be sorry,” he said.
The move appeared to have the desired result: The price of Brent crude, the international bench mark, which had slumped during the summer, rose more than 1.5% after the meeting, extending the gains recorded in recent days and bringing prices back to levels last seen in mid-September. The average price of gasoline in the United States recently began to rise again, tracking the price of oil.
In response to the OPEC+ announcement, Biden administration officials said that the president would order the Energy Department to release 10 million additional barrels of oil from the Strategic Petroleum Reserve in November. Earlier this week, the administration said it had no plans to extend a six-month effort to release 1 million barrels a day, which was scheduled to finish at the end of this month.
Hours before the OPEC+ meeting, the European Union pushed ahead with an ambitious plan promoted by the Biden administration to cap the price of Russian oil, in coordination with Group of 7 nations and others.
The EU cap is intended to set the price of Russian oil lower than where it is today but still above the cost of producing it. The U.S. Treasury Department estimates that the program could deprive the Kremlin of tens of billions of dollars annually. But some analysts say the cap would make the logistics of the oil trade more difficult, driving prices higher. And it relies on the participation of non-EU nations that are still buying Russian oil.
In China, one of the biggest consumers of Russian oil this year, the foreign ministry has criticized the concept, warning last month that oil is too important to the global economy to be subject to the planned price controls.
“Oil is a global commodity – ensuring global energy supply security is vitally important,” Mao Ning, a foreign ministry spokesperson, said on Sept. 5.
And the EU proposal, aimed at pushing down prices, would seem to compete against OPEC+’s action to seek to raise oil prices.
But there is uncertainty about how deep the cut announced on Wednesday will go. Because of a lack of investment, most members of OPEC+ regularly fall short of their production quotas and will not need to trim production much if at all. Richard Bronze, the head of geopolitics at Energy Aspects, a research firm, estimates that the actual cut will be only about 1 million barrels a day.
And the weakening global economy could undermine the Russian and Saudi-led effort to drive up prices. As economic growth slows, demand for oil would slacken.
Wednesday’s meeting was in person, at the headquarters of the Organization of the Petroleum Exporting Countries in Vienna, for the first time since March 2020 – a sign of the significance of the announcement. Among those attending was Russia’s deputy prime minister, Alexander Novak, who has played a key role in fostering cooperation with other major oil-producing countries.
The presence of Novak, who is subject to U.S. sanctions, could come as an embarrassment to officials in Europe when their citizens face what could be a tough winter because of higher energy prices linked to Russia’s war in Ukraine.
The production cut by OPEC+ is a major turnabout in the approach of the 23-member group. After a deep reduction in output in the early days of the pandemic, the group gradually restored production over the next two years. Recently, though, Prince Abdulaziz, who chairs OPEC+ with Novak, began to shift the group’s direction as prices came under pressure.
Last month, the group signaled concerns about the markets with a nominal cut of 100,000 barrels a day. When markets shrugged off that move and oil prices slipped below $80 a barrel for West Texas Intermediate, the U.S. bench mark, the Saudis appear to have decided that a much bolder signal was required.
Analysts said that the increasing intervention in the markets by Washington and the European Union, such as the move to set a price cap for Russian oil, might be pushing OPEC+ into more aggressive moves. Russia wants a higher price to offset the steep discounts it has had to give to sell its oil.
Some oil producers may see the price cap as a precedent that “might be an attempt to drive down prices more generally,” Bronze said. Such worries may explain why OPEC+ “is willing to take such a big step and one that will be so unpopular in Washington,” he added.
At the news conference, Prince Abdulaziz denied any collusion with Russia, portraying OPEC+ as a “band of brothers” interested only in preserving the stability of markets. “Where is the act of belligerence?” he asked.
At one point he instructed an assistant to display a chart showing that crude oil has edged up in price only by a single-digit percentage since January, before Russia invaded Ukraine, while the prices of other energy sources, like natural gas in Europe and coal, have soared.
The group also agreed to extend for one year the agreement that created OPEC+, a combination of OPEC with Russia and its allies. The alliance, which started in 2016, had been scheduled to expire in December.
In the push for higher oil prices, the Kremlin may be using OPEC’s de facto leader, Saudi Arabia, whose leaders want future cooperation from Moscow on energy matters, to make it more costly for the West to take measures against Russia.
“To the extent that prices rise, it will make it that much more challenging for Europe to proceed with its sanctions on Russian oil in December,” said Bhushan Bahree, an executive director of S&P Global Commodity Insights.
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