Why Saudi Arabia Disobeyed The US About The OPEC Supply Cut

Why Saudi Arabia Disobeyed The US About The OPEC Supply Cut

The famous words of the former energy minister of Saudi Arabia were that the country “derives pleasure from keeping everyone on their toes.” That is probably how the kingdom’s decision to lead OPEC to propose a massive oil output cut this week, sparking concerns of even higher inflation only five weeks before the midterm elections, left White House officials and Democratic leaders.

The oil cartel OPEC+, which is run by Saudi Arabia and Russia, decided to reduce output by 2 million barrels per day on Wednesday. This reduction is the largest since the Covid-19 epidemic and is double what analysts had projected. Before the decision, the US launched an aggressive pressure effort to persuade its Arab friends to oppose the cut, but it seemed to be in vain. The majority of the cuts will be undertaken by Gulf producers, while Russia is already pumping below its OPEC+ ceiling.

According to Saudi officials, the kingdom must prioritise its economic interests over domestic political considerations in the US. Prince Abdulaziz bin Salman al-Saud, Saudi Arabia’s energy minister, stated in an interview with Saudi TV on Wednesday that the government is “interested in being part of the growth of the global economy” but that the interests of the Kingdom of Saudi Arabia come first.

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The move by Western central banks to combat inflation with higher interest rates, which might increase the likelihood of a worldwide recession and, in turn, cut demand for oil and cause its price to fall, Prince Abdulaziz said required the cartel to be proactive.

According to Ellen Wald, a nonresident senior scholar at the Atlantic Council think tank in Washington, DC, “this cut seems to be a proactive effort to perhaps avoid a price crash requiring a sudden drop as the US Federal Reserve continues to hike interest rates.”

The Saudi economy has a history of suffering from boom and bust cycles in the oil market, where high prices bring in a flow of cash followed by downturns, due to its substantial reliance on oil earnings. According to experts, the kingdom is making efforts to guard against such a situation.

“Saudi Arabia is trying to prevent a repeat of 2008 when the market meltdown caused the world economy to enter a recession and the sharp drop in oil prices forced OPEC to take emergency measures,” Wald added. Analysts also claim that Saudi Arabia cannot, due to financial constraints, allow oil prices to fall below a particular threshold. After eight years of deficits brought on by low oil prices and the Covid-19 outbreak, the kingdom is anticipated to have its first financial surplus this year.

The International Monetary Fund estimates that global oil prices need to be approximately $79 per barrel for its budget to balance. From a peak of $139 just seven months prior, prices sank to $85 per barrel last month. That served as a cautionary tale for Saudi Arabia and other oil exporters, whose primary source of income is oil.

Saudi Arabia “would want to see prices rising closer to the high $90s,” said Robert Mogielnicki, a senior expert at the Arab Gulf States Institute in Washington, adding that the country “does not want to merely balance the books, they want to secure a continual supply of surpluses.”

With an average price of $3 per barrel, Saudi Arabia has the cheapest oil extraction costs worldwide. It follows that the vast majority of the money collected from each barrel is invested in its funds. And despite the recent introduction of additional taxes and efforts to diversify the economy, those revenues are required to support anything from future trillion-dollar communities in the desert to a sizable government wage bill.

Omar Al-Ubaydli, director of research at the Bahrain-based Derasat think tank, explained that “conventional tax instruments are largely absent, especially personal income tax,” adding that “the high price [needed to balance the budget] is because of the large spending on government services, infrastructure investment, the public sector, etc.”

Al-Ubaydli continued, “The government is attempting to have a broad and reliable source of income since unstable government finances are seriously disruptive to the economy. However, the Democrats’ response has been furious, with politicians painting Saudi Arabia’s move as a hostile act against the US that helps Russia by funding its conflict in Ukraine with petrodollars.

Senate Majority Leader Chuck Schumer, a Democrat, tweeted on Friday, “What Saudi Arabia did to enable Putin to continue to conduct his disgusting, cruel war against Ukraine will long be remembered by Americans.”

The Biden administration responded right away. OPEC+ is siding with Russia, according to a statement released on Wednesday by White House press secretary Karine Jean-Pierre. On Thursday, Secretary of State Antony Blinken stated that the White House is “working closely with Congress” and that the US is “reviewing several reactions” to Saudi Arabia’s action. The response is being referred to as “hysterical” by some Saudis.

The Biden administration may now endorse the bipartisan NOPEC measure, which by removing immunity from the cartel’s national oil firms might subject members of OPEC+ to antitrust charges. Mohammed Alyahya, the senior fellow at the Hudson Institute in Washington, DC, claimed that the response coming from policy circles in the capital was overstated. Saudi Arabia’s key concern is keeping OPEC+ nonpartisan and concentrated on technical issues.