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OPEC+ Production Cuts: Saudi’s Act of Rebellion?

December 6, 2022
By CGC
Insight & Analysis,The Cold War Project

 

Picture Courtesy: Reuters
Photo Courtesy: Reuters

By Yash Singh on December 7, 2022

On October 5, OPEC+ announced that they will begin cutting their crude oil production quota by 2 million barrels per day beginning in November 2022. OPEC+, which comprises a total of 23 member states, is the expansion of the homonymous cartel Organization of the Petroleum Exporting Countries (OPEC). The decision to limit crude production was taken by the de facto leader of the group, Saudi Arabia, which claims the decision ‘was taken unanimously’ (Brower and Politi, 2022).

Following this announcement, the United States (U.S.) criticized the move by accusing the Saudis of passively aiding the Russian invasion of Ukraine, given that Moscow is among the top two exporters of crude oil in the world (Knipp, 2022). Provided that the global commodity market has a speculative nature, such deep cuts will shoot up crude prices and thus aid monetising the Russian war machinery. This decision may also aggravate the already decaying relations between the Biden administration and the de facto Saudi leader Crown Prince Mohammad bin Salman. In fact, during his presidential campaign in 2020, Biden had promised to make bin Salman a “pariah” for his alleged role in the murder of the Saudi dissident journalist Jamal Khashoggi in Turkey in October 2018. In February 2021, President Biden also declassified an intelligence report which held the Crown Prince responsible for the murder (Shavit and Guzansky, 2021).

The announcement of the cuts already evoked sharp reactions from the US government. President Biden warned Riyadh of “consequences”. US lawmaker and the chairman of the powerful Senate Foreign Relations Committee, Bob Menendez, called for an ‘immediate freeze on all cooperation with Saudi Arabia, including arms sales’ (Laskar, 2022). The decision might unravel the oil-for-security agreement established between the two countries in 1945, according to which the U.S. acts as a security guarantor of Riyadh in the volatile region. The accord had even withstood the test of the Cold War and the 9/11 attacks. Hence this begs the question- why did OPEC+ decide to limit crude oil production?   

On October 13, the Saudi Foreign Ministry said in a press release that the decision was solely based on economic considerations (Inayatullah, 2022). In fact, in OPEC’s Monthly Oil Market Report (MOMR) released in October 2022, Yaseen and Spitzy (2022) emphasise economic and political variables that have been negatively impacting the current global economic growth. ‘The world economy has entered into a time of heightened uncertainty and rising (geopolitical) challenges, amid ongoing high inflation levels, monetary tightening by major central banks, high sovereign debt levels… [and] ongoing supply issues’ (Yaseen and Spitzy, 2022, p. 11). The MOMR also revised the global economic growth rate previously predicted in the report released in September: calculations resulted in a slight decline from 3.1% to 2.7% for 2022 and from 3.1% to 2.5% for 2023. The economic growth prediction for top economies for 2023 was revised as well: the US is predicted to grow at 0.8% (down from 1.6%), China at 5.6% (down from 6%), the Eurozone at 0.3% (down from 1.7%) and the UK at 0% (down from 1.2%).

These statistics are corroborated by the estimations of the International Monetary Fund (IMF) in its World Economic Outlook (WEO) also released in October 2022. In fact, the report states that ‘global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023’, thus representing the ‘weakest growth profile since 2001’, with the exception of the 2008 financial crisis and the COVID 19 pandemic (International Monetary Fund, 2022a, p. xvi). Moreover, the 2022 World Energy Outlook (WEO) report released by the International Energy Agency (IEA) warned that the Russian invasion of Ukraine and its subsequent impact on the global energy crisis have ‘stoked inflationary pressures and created a looming risk of recession’ (International Energy Agency, 2022, p. 19).

OPEC+ is mostly made up of countries that are textbook rentier states as they derive a major portion of their export revenues from the sales of hydrocarbons. Saudi Arabia has been recording budget deficits for the last 8 fiscal years on the back of low oil prices owing to factors such as the shale revolution and (later) the pandemic (Saba, 2021). As per another IMF report, Riyadh needs crude oil prices at USD 79.2 per barrel in order to break even the budget in 2022 (International Monetary Fund, 2022b). This year Saudi Arabia has already recorded a budget surplus of USD 40 billion for the first 9 months on the back of high oil prices. Given the aspirations of the kingdom to achieve its ambitious 2030 Vision and accommodate its burgeoning public sector spending commitments (estimated at 1.1 trillion Riyals or USD 292 billion in 2023), Riyadh needs crude prices well above the budget breakeven price (Nair, 2022). Given the predictions vis-à-vis the global economy varying from low economic growth to a recession, the Saudis aim to shore up as much revenue from the oil sales as possible before demand destruction materialises via rising unemployment, high inflation, high-interest rates by central banks and low/negative economic growths in major economies. 

During the previous instances of oil crashes such as the 1998 Asian Financial crisis, the 9/11 attacks, the 2008 financial crisis, and the 2014-2016 oil plunge, the Saudi-led OPEC failed to arrest the dip in oil prices owing to a lack of support in production cuts by major non-OPEC producers, especially Russia. As an International Monetary Fund (2015, p. 8) report notes, this negatively affected the real GDP of Riyadh by impacting their fiscal balances in all the said instances. The culmination of OPEC+ in late 2016 by bringing Russia on board was a significant geo-economic achievement by the Saudis. This provided a framework for coordinating oil prices by cooperatively balancing the domestic fiscal imperatives with the global economic scenario. Within this context, the October 2022 oil cuts announcement reinforces the OPEC+ partnership as the two largest oil producers implement their respective quota cuts on the back of bumper revenue from oil sales. Such profitable coordination also nudges the two countries to formalise this relationship into a powerful oil bloc which neutralises the very rationale of the U.S. to uphold its end of the oil-for-security pact. 

Notwithstanding these factors, one might define Saudi’s argument far-fetched. Saudi Arabia will not abandon the 1945 Pact by formalising its hydrocarbon alliance with Russia. The act of “defiance” in the form of production cuts by Riyadh, hence, requires a geo-strategic rationalisation as well. Saudi Arabia aims to maintain and strengthen its pre-eminence in the Arab world and its geostrategic importance to the American security calculus via this “act of rebellion”. Given the proximity between Moscow and Tehran, Riyadh’s bitter regional rival, Saudi Arabia does not desire to put all its eggs in the Russian basket. 

Nevertheless, Riyadh’s traditional political and security relationship with Washington D.C. has developed an unsettling degree of trust gap over the past decade. The Arab Spring in 2011 coincided with the advent of the American policy of “drawdown”, when Washington D.C. started reducing its military footprint from critical geopolitical theatres (such as Asia) to focus upon its policy of “pivot to Indo-Pacific”. During this era of unrest in the Middle East, the credibility of American political support to the local regimes and allies came under intense scrutiny. The acts of abandonment of the Hosni Mubarak regime of Egypt in 2011, reconciliation with Iran and the formalisation of its nuclear programme, failing to neutralise the Assad regime in Syria and overlooking Iran’s “destabilising machinations” in Iraq, Syria, Lebanon and Bahrain through its proxies created a “crisis of confidence”  between the two countries. This situation was aggravated by the continued criticism of the established Arab regimes by the U.S. for its inability to manoeuvre the region through turmoil without American support. ‘President Obama complained about America’s allies as “free riders” and advised the Saudis to “share the neighbourhood” with Iran’ (Goldberg, 2016, cited in Lieber, 2017, pp. 44-45). It meant that ‘the Kingdom of Saudi Arabia…[had] no choice but to become more assertive in international affairs: more determined than ever to stand up for the [region’s] genuine stability…’, wrote the Saudi ambassador to Britain in 2013 (Al Saud, 2013). 

The Trump era restored a degree of amiability to the relations. However, the Khashoggi episode threatened to rupture the relations even as President Trump leveraged his authority to provide immunity to the Crown Prince by classifying the intelligence report that had indicted bin Salman of the murder. The advent of President Biden to the White House reversed the thawing of the relations between the two countries. Firstly, as previously mentioned, President Biden declassified the intelligence report. This was seen as a corollary to the public criticism of the Crown Prince during his campaign. In fact, ‘Biden [also] reversed the Trump administration’s last-minute designation of the Houthis as a terrorist group, citing the move’s potential damage to aid deliveries in Yemen’ (Robinson, 2022). In addition, ‘messages by senior administration spokesmen since the report was published highlight the American intention to focus on human rights – and inter alia this will affect relations between Riyadh and Washington’ (Shavit and Guzansky, 2021, p. 1-2).

Moreover, the ‘Biden administration is sharply reducing the number of U.S. anti-missile systems in the Middle East in a major realignment of its military footprint there as it focuses the armed services on challenges from China and Russia, administration officials said’ (Lubold et al, 2021). This signalled this secular trend of Washington D.C. pivoting away from the West Asian theatre, along with the decision to withdraw from Afghanistan in August 2021 and Biden’s assurance to return the U.S. to its full commitments to the Iran nuclear deal. This means that the Gulf region will likely turn into a geopolitical battleground where Iran, as Riyadh fears, will threaten to undermine Saudi security interests via its proxies both within its sovereign borders and in the wider region. In fact, the Iran-backed Houthis have already been conducting acts of terrorism on Saudi soil, the most infamous one being the Abqaiq and Khurais drone attacks in 2019 September that caused significant damage to the country’s oil infrastructure (Turak, 2022). 

Furthermore, according to the US, the unravelling of the invasion of Ukraine in synergy with the increasing assertiveness of Beijing in the Indo-Pacific means that the middle east is likely to be relegated to the periphery of strategic importance as Washington seeks to commits its military overstretched resources to the east Asian and European theatre. Although the U.S. Secretary of Defence Llyod Austin publicly assured that ‘America’s commitment to security in the Middle East is strong and sure’ in last year’s Manama Dialogue in Bahrain, there is nevertheless ‘a looming fear among America’s allies in the area that the US defeat in Central Asia’s Great Game may be followed by its withdrawal from the Middle East’ (Carnelos, 2022). With the “victory” in the Yemen war being more elusive than ever and the situation compounded by the assertiveness of the Houthis to launch offensives on Saudi soil and the surrounding regional countries, Riyadh needs the American security infrastructure to defend its national interests – its energy infrastructure being the most critical one. Hence, the production cuts were likely an “act of rebellion” to remind Washington D.C. to keep west Asia at the core of its strategic thinking. The cuts were an expression of the sway that Riyadh holds within OPEC+ in influencing the global energy dynamics. The message is that oil is still the fuel that runs the global economic engine and west Asia is still the dominant source of this energy. As a result, it is in the best interest of the U.S. to remain committed to regional stability and work towards the compatibility of the security interests of its allies with its own. 

Irrespective of the characteristics of the international order in terms of polarity, the U.S. remains the only country in the world to administer a wide network of military presence and prowess across the world as it does. The other two major military powers, Russia and China, enjoy close relations with both Riyadh and Tehran. However, even if Moscow and Beijing were close allies of Riyadh, neither of the two has the military capabilities required to act as a regional security guarantor. Saudi Arabia recognises this and would thus not want Washington D.C. to pivot towards Europe and the Indo-Pacific at the expense of the west Asian theatre. To achieve this, Riyadh will keep reminding, via diplomacy or other methods, the U.S. of the critical importance that the region holds in terms of global energy supply, the unimpeded flow of which is critical to the latter’s economic interests.    

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