How OPEC's oil cuts are souring the relationship between the US and Saudi Arabia

The world’s major oil producers have decided to slash the amount of oil they deliver to the global economy, driving up prices and souring the relationship between the US and Saudi Arabia.

The Organisation of the Petroleum Exporting Countries Plus (OPEC+), which includes Russia and Saudi Arabia, announced last week it would cut production by 2 million barrels a day, which will help prop up oil prices that are allowing Russian President Vladimir Putin to keep paying for his eight-month invasion of Ukraine.

The cuts equal 2 per cent of the global supply and come as the US and Europe try to cap the oil money flowing into Moscow.

Here’s what the OPEC+ decision could mean for the economy and the relationship between the United States and Saudi Arabia. 

What is OPEC+? 

OPEC+ is a group of oil exporters consisting of 23 member countries which meet regularly to decide how much crude oil to sell on the world market. 

The OPEC cartel gained 10 non-OPEC countries, including Russia, in 2016, with the larger group distinguished by a plus sign. 

Its mission statement says it aims to “secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry”.

Why is OPEC+ cutting production? 

The group says it has slashed production in case demand for oil slows

Saudi Arabia’s energy minister Abdulaziz bin Salman said the alliance was being proactive in adjusting supply ahead of a possible downturn because a slowing global economy needed less fuel for travel and industry.

“We are going through a period of diverse uncertainties which could come our way, it’s a brewing cloud,” he said.

Ahead of the announcement, oil prices had fallen after a season of highs.

Prices have already risen since the OPEC+ decision last week. 

Decision disappoints Biden 

The Saudi-led OPEC+ ignored pleas from the US White House, which wanted production increased both to avoid a rise in fuel prices and to drive down the global oil price and so help reduce the money going into Russia.

Rising fuel prices are a risk to Joe Biden’s Democratic Party as it seeks to retain control of Congress in the November 8 midterm elections. 

Some European nations also want more oil produced to reduce petrol prices and punish Russia for invading Ukraine

But OPEC+ said its new agreement would remain in place until the end of next year unless the market changed.

“[We believe] by the decision that OPEC+ made last week, they certainly are aligning themselves with Russia,” White House press secretary Karine Jean-Pierre said on Tuesday.

“And right now, this is not a time to be aligning with Russia, especially with this brutal, unprecedented war that they have started in Ukraine.”

How has the West been targeting Russian oil? 

The US and Britain imposed bans that were mostly symbolic because neither country imported much Russian oil.

The White House held off pressing the European Union (EU) for an import ban.

Such a ban would have a big impact on those countries, which get a quarter of their oil from Russia.

In the end, the EU decided to cut off all Russian oil imports that arrive by ship from December 5, while keeping a small volume of pipeline supplies that some countries rely on.

Beyond that, the US and other major democracies are working out the details of a price cap on Russian oil.

It would target service providers that facilitate oil shipments from Russia to other countries.

The EU approved a measure along those lines in early October.

Many of those providers are based in Europe and will be barred from dealing with Russian oil if the price rises above the cap.

How will oil cuts and price caps clash?

The idea behind the price cap was to keep Russian oil flowing to the global market, just at lower prices.

Russia, however, has threatened to simply stop deliveries to those that observe the cap.

That could take more Russian oil off the market and push prices higher.

That could push costs at the pump higher, too.

US petrol prices soared to record highs in mid-June and have been on the rise again — not what Mr Biden wants a month before elections.

What will this mean for Russia?

Analysts say that Russia, the biggest producer among the non-OPEC members in the alliance, would benefit from higher oil prices ahead of a price cap.

If Russia has to sell oil at a discount, the blow will be softened by the reduction starting at a higher price level.

High oil prices earlier this year offset much of Russia’s sales lost from Western buyers avoiding its supply.

The country has also managed to reroute some two-thirds of its typical Western sales to customers in places like India.

But Moscow saw its take from oil slip significantly from June to August as prices and sales volumes fell, according to the International Energy Agency.

A third of Russia’s state budget comes from oil and gas revenue, so any price caps would further erode a key source of revenue.

Meanwhile, the rest of Russia’s economy is shrinking due to sanctions and the withdrawal of foreign businesses and investors.

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