On Wednesday, the oil-producing cartel OPEC+, a group that includes Persian Gulf countries and Russia, agreed to reduce production by two million barrels per day in order to keep prices high amid concerns about a recession. The news sparked a strong backlash from the United States—particularly after US President Joe Biden had visited Saudi Arabia this summer in an effort to repair ties—with reports indicating that the Biden administration may be rethinking its engagement with oil-producing Venezuela. (The White House quickly denied any policy change toward Caracas.)
How will OPEC+’s move shake the global energy market, as well as US diplomatic interests from the Middle East to Latin America? What’s the impact for Russia amid its war in Ukraine? Experts from across the Atlantic Council are weighing in. This post will be updated as more reactions arrive and new developments unfold.
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US-Saudi divisions are real; US-Venezuelan rapprochement may not be
It’s been a busy week for energy and economic statecraft issues. The OPEC+ decision to cut production by up to two million barrels per day was seen by many observers as siding with Russia at the expense of the United States and its Western allies. It is no secret that Saudi Arabia was the primary driver of this cut, which Russia supported, and that Riyadh has had a difficult relationship with the Biden administration despite Biden’s recent visit to the kingdom.
The Biden administration’s response was unusually aggrieved—threatening, in effect, to explore busting the global oil cartel. It comes amid US and European Union (EU) efforts to implement a price cap on Russian oil exports that appears to have angered the Saudis, as well as sustained US concern over high energy prices potentially driving a global recession.
Where things go from here is anyone’s guess, and it’s worth remembering that noise does not always have an effect amid the cacophony. It is difficult to see how Riyadh benefits in the middle to long term from a true shift away from the West and toward an increasingly isolated and dangerously unpredictable Kremlin, and the true impact of this week’s OPEC+ decision will only be known in future oil prices that the Dow Jones Industrial Average doesn’t appear overly worried about (the stock-market index is up this week). But the divisions between the United States and Saudi Arabia appear to be real, and there is significant frustration beyond just the White House with Riyadh’s direction under Crown Prince Mohammed bin Salman.
In a similar vein of noise not always equaling results, the release of American hostages from Venezuela in exchange for clemency granted to nephews of Venezuelan President Nicoás Maduro’s wife (and Venezuela’s arrest of US fugitive “Fat Leonard” Francis) has renewed speculation that Washington will soon lift some oil sanctions on Venezuela in exchange for progress on democratic elections. We have heard this song and dance already this year, as many speculated the Biden administration would seek to ease global oil prices by allowing Venezuelan crude to re-enter global markets. Ultimately, however, the Biden team granted a narrow technical exception to several companies, including Chevron, to retain investments in Venezuela but not actively operate them. The Biden administration has denied reports of a change in its stance that sanctions relief will only come after restoration of democratic processes in Venezuela, and it is hard to envision any significant change in the Washington-Caracas relationship despite some recent thawing.
—Brian O’Toole is a nonresident senior fellow with the Council’s GeoEconomics Center and a former senior adviser to the director of the Office of Foreign Assets Control (OFAC) at the US Department of the Treasury.
Production cuts will backfire on Saudi Arabia
The OPEC+ production cut is, in part, a Russian effort to inflict economic pain on the United States and Europe to end support for Ukraine’s defense against Russian aggression. However, Washington was genuinely surprised and angered that Saudi Arabia would support a step that, while it may be to its short-term economic benefit, is at odds with Saudi Arabia’s long-term security interests. This looks like a targeted Saudi decision to weaken US President Joe Biden and Democrats in advance of the November elections. Democrats in Congress, especially, are likely to remember this in future votes on defense budgets and commitments to Gulf security. Efforts to punish OPEC+ members will now gain substantial momentum in Congress. Bipartisan efforts after the November elections should not be a surprise.
With Iran lurching toward nuclear-weapons capability, many observers believe that the long-term interests of the Arab Gulf countries, Saudi Arabia in particular, would have been better served by strengthening security ties with the United States, in an effort to stem the tide of voices from both sides of the aisle in Washington calling for US military withdrawal from the Gulf. Iran showed in 2019 its willingness to attack Saudi oil infrastructure. A nuclear-armed Iran would be a greater security threat to the region than anything since the 1979 Iranian revolution overturned almost every security relationship in the Middle East. As a result of the OPEC+ production cuts, efforts to end Western reliance on Middle Eastern and Russian energy will now get serious. This could have an impact beyond the US-Saudi relationship and could change the security picture in the Middle East more than anything since 1979.
—Thomas S. Warrick is a nonresident senior fellow at the Council’s Scowcroft Center for Strategy and Security. He is a former senior official at the US Department of State and deputy assistant secretary for counterterrorism policy at the US Department of Homeland Security. He is a senior member of the Society of Petroleum Engineers.
Inside the Saudi calculus on oil cuts—and the US response
The decision by the OPEC+ alliance of oil-producing nations to reduce output beginning next month is probably not aimed solely at President Joe Biden or the United States. But the manner in which it’s being implemented probably is—and it has the potential to be politically damaging for both the president and Democrats. The timing of the cuts—to take effect November 1, one week ahead of the US midterm elections—and their intensity, removing two million barrels per day from the market, probably reflect a willingness by Saudi Arabia to jab at Biden. Riyadh is not naïve about the US political landscape. OPEC+ almost certainly could have achieved its same overall goal but waited to act until shortly after the US midterms.
The fundamental problem between the United States and Saudi Arabia is one of continued, misaligned expectations. Saudi Crown Prince Mohammed bin Salman (MBS) continues to demonstrate his preference for global engagement that is transactional, similar to how both China and Russia generally engage in the world. The problem is, that’s not traditionally how Washington conducts foreign policy, preferring long-term strategic relationships…
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—Jonathan Panikoff is the director of the Atlantic Council’s Scowcroft Middle East Security Initiative and the former deputy national intelligence officer for the Near East.
The views expressed in this publication are the author’s own and do not imply endorsement by the Office of the Director of National Intelligence or any other US government department or agency.
OPEC+ decision raises the stakes for the Russian oil price cap
High oil prices are the single biggest reason why Russia has been able to withstand the shock of Western sanctions. The ruble’s depreciation was short-lived, and the Central Bank of Russia is likely to have more than recovered the three hundred billion dollars of reserves that were frozen by Western central banks at the beginning of the war.
Tackling Russia’s high oil revenues without depressing supply is a conundrum that the Biden administration has proposed solving through a “price cap,” an idea it’s been advocating since June. After considerable hesitation, Western partners have come around to the idea. There is still some work to be done on the date and the level of the cap, but we now know that implementation will be done via insurance providers, who will have to ask buyers of Russian oil for an attestation that they have paid below the cap.
In June, the consensus was that oil prices would fall by the end of the year—causing some commentators to doubt the utility of a measure that will inevitably add a layer of complexity to transactions. Now, the OPEC+ agreement to limit supply provides a new impetus to finalize the price cap before December, when the EU ban on Russian oil imports becomes effective. At that point, the hope is that new buyers like China and India will comply with the cap as this will provide them with cheaper oil.
In Vienna on Wednesday, Russian Deputy Prime Minster Alexander Novak said the cap had forced OPEC+ participants to limit supply. Given that the cap is not yet in place, this argument should simply be seen as another attempt to argue that sanctions are futile and the West is bringing economic woes upon itself.
The real question is whether the cap, once it is in place, can indeed force Russia to sell at a greater discount to new buyers. Western capitals anticipate some cheating but think it’s a risk worth taking.
—Charles Lichfield is deputy director of the GeoEconomics Center.
Saudi Arabia and the UAE are simply no longer US allies
That OPEC+ would cut production at its latest meeting was unsurprising, but those cuts amounted to double the volume expected by the market. From Abu Dhabi’s point of view, this was a rational reaction to a looming global recession in 2023. For Riyadh, it’s probably more emotional and betrays an annoyance at European moves to impose price caps on Russian oil imports, a policy that has been strongly encouraged by Washington. For the record, the effectiveness of those price caps is doubtful—but they set a precedent that scares those who expect to feed European hydrocarbon dependence.
More telling is the American reaction. Washington perceives the production cuts as evidence of a lack of solidarity among allies vis-a-vis Russia. The White House press secretary said directly that “OPEC+ is aligning with Russia.” That’s hyperbole.
What is true is that Saudi Arabia and the United Arab Emirates are simply no longer US allies. Their political independence on global oil policy, coupled with ongoing cooperation in other areas, underscores a reality that is dawning late on some in Washington: Things have changed since the Obama administration. And prevailing calculations over what stokes a coming economic recession—whether commodity shocks or monetary policy—are simply different.
But geopolitics are still at play, and Gulf producers are keen to walk a fine line. The week also saw warm outreach to China. No matter the self-interested posturing by the two principal Gulf monarchies, the resulting boost to Russian oil revenues—which are far higher than those from gas (and growing)—is more an indication of the West’s lame approach to oil sanctions than a dramatic story of allied betrayal.
—Phillip Cornell is a nonresident senior fellow at the Council’s Global Energy Center, principal for energy and sustainability at Economist Impact, and former senior corporate planning advisor to the Chairman and CEO of Saudi Aramco.
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