OPEC+ Oil Cuts
Q: Why did OPEC+ cut oil production quotas?
A: On October 5, 2022, OPEC+ announced its intent to reduce oil production targets by two million barrels per day. OPEC+ member state Saudi Arabia announced that the decision was based on economic considerations, including supply and demand and market volatility. OPEC+ has expressed hope that decreased supply will increase oil prices, which fell from over $120 to $90 per barrel over the course of 2022.
Q: What has caused recent energy market instability?
A: Oil shortages are partially responsible for market instability related to price fluctuation. Despite global demand remaining stable, contracting OPEC+ production quotas limit oil supplies, triggering price increases.
Recent energy instability has also been also triggered by Russia’s invasion of Ukraine. Given Russia’s position as the world’s third largest provider of oil and gas, investors reported fears about the impact on exports of sanctions, conflict zones, and Russian retaliation against the West. During this period, oil prices increased to triple digits per barrel for the first time since 2014 amid a slow recovery in production from low pandemic levels.
Q: How has energy market instability impacted U.S.-Saudi relations?
A: During a U.S. visit to Saudi Arabia in July, President Biden sought to convince Crown Prince Mohammed bin Salman to increase OPEC+ oil production targets. Following the visit, OPEC+ announced an increase of 100,000 barrels, a number some experts argued was “almost insulting” to Biden.
U.S. National Security officials have publicly questioned Saudi Arabia’s role in bringing about production cuts, arguing that it, as OPEC+’s de facto leader, coerced smaller states into the decision. The Kingdom responded that this decision was not self-led, but “unanimous” among OPEC+ parties.
Q: How has the U.S. responded to these cuts?
A: Faced with the prospect of high gas prices coinciding with midterm elections, the Biden administration and various U.S. senators have promised to retaliate against Saudi Arabia. While executive officials have not yet produced concrete measures to this aim, congressional officials have communicated intentions to sever security connections with Saudi Arabia, including ending arms sales and removing U.S. troops from the Gulf state. The White House also announced its intentions to release an additional 10 million barrels from the U.S. Strategic Petroleum Reserve to the market in November in an effort to reduce oil prices for consumers.
Q: Have other oil-producing giants, including other OPEC+ members, defended the cuts?
A: The United Arab Emirates’s Energy Minister took to Twitter to defend the OPEC+ decision, writing that it was “unanimously approved” and purely “technical.” Representatives from Oman, Bahrain, and Algeria have echoed these sentiments. The cuts have also received support from OAPEC (Organization of Arab Petroleum Exporting Countries), whose secretary general argued that it is consistent with prior OPEC+ efforts to proactively avoid market imbalances and combat global economic uncertainty.
Q: Why did the U.S. argue that the production decrease was politically motivated?
A: The United States presented Saudi Arabia with analysis demonstrating that allegedly, there was no “market basis” which might motivate production cuts. The U.S. further argued that production cuts demonstrate support towards Russia’s war efforts in Ukraine by increasing oil prices and, accordingly, softening the blow of sanctions against Russia.
The Saudi Foreign Ministry rejected these claims, asserting that the Kingdom supports international law and UN resolutions on the Russia-Ukraine conflict, which it called “unfortunate.” Some analysts have backed this interpretation, arguing that the production quota decrease was not politically motivated, but rather that it reflected OPEC+ states’ concerns about global recession and falling oil prices.
Q: How do Russia’s interests in Ukraine coincide with its agenda as the OPEC+ co-chair?
A: Given that the Russian economy depends heavily on oil and gas export revenues, rising prices can undermine the effectiveness of global sanctions against Russia. Russia requested a decrease in OPEC+ production quotas, a move that some analysts have labeled an indication of soon-to-be decreasing production that must be counteracted by rising prices in order for Russia to maintain its war in Ukraine.