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October 5, 2022
Today the OPEC+ oil cartel announced it will cut output by 2 million barrels a day, beginning in November. Since the world currently consumes about 100 million barrels of oil a day, this will be a cut of about 2%.
OPEC is short for the Organization of Petroleum Exporting Countries. It includes 13 member states, led by Saudi Arabia, and produces 44% of the world’s oil. Eleven other countries work alongside OPEC and make up OPEC+. Those additional countries include Russia, and together with OPEC, they control more than half of the world’s oil, about 55% of it.
OPEC+ countries cooperate to reduce market competition and raise prices.
The cost of oil has dropped steadily during the course of the summer, falling about 32% until it fell below $80 a barrel for the American oil the U.S. uses as a benchmark. With today’s announcement, the price of a barrel of oil started to move upward again.
The decision of OPEC+ to cut production is not simply about prices. It is about the ongoing struggle over democracy playing out in Ukraine, as the Ukrainians fight off the Russian invaders.
The Russian economy depends upon oil sales, and the U.S. and European Union have sought to cut into that money to hurt Russia’s ability to continue its attack in Ukraine. A day ago, after Russia illegally annexed four regions of Ukraine, the 27 member nations in the European Union joined the G7 (which is made up of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) to set a price cap on Russian oil, in addition to another round of sanctions. Theoretically, this plan should have enabled countries that need Russian oil for heat this winter to get it, while keeping the prices low enough to starve Putin’s war efforts.
Russia is co-chair of OPEC+ and is desperate for oil money, on which its economy depends. That economy is crumbling under international sanctions, and Russia’s oil production has dropped about a million barrels a day at the same time that the country has been forced to discount its oil to sell it. As Russia’s invasion of Ukraine is failing, it needs more money, and Russia asked for the OPEC+ cuts to increase prices.
“It’s clear that OPEC+ is aligning with Russia with today’s announcement,” White House press secretary Karine Jean-Pierre said, and OPEC+ delegates said the move was, indeed, a big win for Russia.
Biden took heat earlier this year when he traveled to Saudi Arabia to ask leaders to increase production, in part to ease gas prices here in the U.S., which soared after the economy came roaring back after the worst of the pandemic passed and after Putin invaded Ukraine. At the time, the Saudis increased production slightly, but this announced cut makes Saudi Arabia’s rejection of Biden’s request clear, even though the Saudi energy minister, Prince Abdulaziz bin Salman, said that OPEC+ was simply trying to stabilize markets in the face of a cooling global economy.
It is not immediately clear just how badly this development will hurt prices as the global economy slows and there is less demand for oil. Still, the announcement of the cuts a month before the U.S. midterms certainly seems like an attempt to influence U.S. politics. It is no secret that Saudi leaders cultivated the Trump family, which returned their overtures, and last year, Saudi leader Crown prince Mohammed bin Salman overruled the advisors of the main Saudi sovereign wealth fund to invest $2 billion of the fund in a new investment company run by Jared Kushner, former president Trump’s son-in-law.
Of today’s news, the Biden White House said: “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. At a time when maintaining a global supply of energy is of paramount importance, this decision will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices.”
Apparently recognizing that higher oil prices could well translate into higher gas prices and hamstring the Democrats right before the midterms, the White House statement touted how the president and allies around the world have helped to bring gas prices down by $1.20 to an average of $3.29 a gallon. It said that the administration would continue to release oil from the Strategic Petroleum Reserve, a release that has significantly lowered oil prices and is part of why OPEC+ is upset. The administration will also continue to increase domestic production and has asked U.S. energy companies, which have been making record profits, to close “the historically large gap between wholesale and retail gas prices—so that American consumers are paying less at the pump.”
The administration also said that “in light of today’s action,” it would “consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices.”
“Finally,” it said, “today’s announcement is a reminder of why it is so critical that the United States reduce its reliance on foreign sources of fossil fuels.” It reminded Americans that the Inflation Reduction Act was the nation’s most significant investment ever in transitioning to clean energy and increasing energy security by fulfilling our energy needs at home.
(Folks: Perhaps fittingly, our power is out. I won’t be able to make corrections tonight, so apologies in advance if I’ve messed something up. And don’t worry– we are perfectly safe– this just happens here sometimes.)