OPEC slashes oil production as recession looms, with developing countries set to be the biggest losers

A cartel of oil-producing countries led by Saudi Arabia has agreed to steep cuts in oil production, defying a behind-the-scenes diplomatic push by the Biden administration to avert cuts that could push up global gasoline prices and may offer a small lifeline to Russia’s battered wartime economy. 

In a meeting on Wednesday in Vienna, the OPEC+ group that comprises most of the world’s top oil exporters agreed to cut production, on paper, by 2 million barrels per day — the biggest slash in production since the beginning of the COVID-19 pandemic in 2020. In reality, the cartel will probably shave something like 1 million barrels off the market, since most OPEC members are already underproducing. Crude prices nudged upward Wednesday but didn’t spike.

“They agreed to a larger cut on paper so they wouldn’t have to renegotiate quotas, which is always like pulling teeth,” said Matthew Reed, an expert on the oil industry and the vice president of Foreign Reports, a Washington-based consulting firm. “This is crucial. It means OPEC will take less oil off the market than the headlines suggest.”

The reason for the cuts, despite protestations from the White House, is not punitive politics. Rather, it’s the spectre of a looming global recession that will cut deeply into global oil demand. Last week, Goldman Sachs cut its 2023 oil price forecast from an earlier prediction of US$125 per barrel to $108, following a sluggish global demand for oil, which was exacerbated by central banks tightening rates worldwide.

Still, for the Biden White House, which courted Saudi Arabia and other Gulf countries this year to ensure a plentiful supply of oil, the decision is a blow. Two of Washington’s most important Middle Eastern partners, Saudi Arabia and the United Arab Emirates, sided with other major oil powers, including Russia, in the decision to slash oil production. Multiple senior Biden administration officials, including Amos Hochstein, President Joe Biden’s leading energy envoy, played a role in the failed campaign to pressure OPEC+ members to avoid the cuts, as CNN reported. 

The announcement sparked anger among US lawmakers, including allies in Biden’s Democratic Party, who have criticised the president for pursuing closer relations with Saudi Arabia in recent months. “I thought the whole point of selling arms to the Gulf States despite their human rights abuses, nonsensical Yemen War, working against US interests in Libya, Sudan etc, was that when an international crisis came, the Gulf could choose America over Russia/China,” Democratic Senator Chris Murphy, a member of the Senate Foreign Relations Committee, commented on Twitter. 

“President Biden should make it clear that we will stop supplying the Saudis with weapons and air parts if they fleece the American people and strengthen Putin by making drastic production cuts,” Representative Ro Khanna, a progressive Democrat, said of the news. “They need us far more than we need them.”

In a joint statement from the White House, National Security Adviser Jake Sullivan and National Economic Council Director Brian Deese said the president was “disappointed” by the OPEC+ grouping’s decision to cut oil production amid the energy crunch caused by Russia’s invasion of Ukraine, calling the decision “shortsighted”. 

“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,” Sullivan and Deese said. The administration suggested that it might be receptive to draconian legislation, drafted nearly every year for decades, that would put OPEC under antitrust scrutiny. 

While the Biden administration has benefited, both politically and economically, from low gasoline prices that came down after their early summer highs, OPEC producers are concerned about two things: a plunge in demand (and oil prices) and the G7’s plan to cap prices on Russia’s oil exports. OPEC wants to remain a seller’s cartel, not leave pricing up to consumers.

“The Biden administration and OPEC producers have different opinions about market conditions, or they’re concerned about different things,” said Samantha Gross, an energy security expert at the Brookings Institution. “They’re always going to do what’s best for them. We can’t expect them to go against their own interest to serve ours.”

Among the top officials attending the OPEC+ gathering in Vienna was Alexander Novak, Russia’s deputy prime minister. Novak has played an important role in helping the Kremlin to maintain diplomatic ties with other major oil producers, even as the United States and its Western allies have campaigned to diplomatically and economically isolate Russia after it invaded Ukraine. 

The cartel’s decision also deals a symbolic blow to US efforts to strip Russia of tens of billions of dollars in oil revenue — a crucial lifeline for the country’s struggling economy — after the West accused the Kremlin of weaponising its energy supplies for geopolitical leverage. 

If it’s a symbolic blow to Western efforts against Russia, the practical impact of the production cuts for Moscow could be negligible, Reed said. “They only formalise on paper the barrels Russia has already lost because of sanctions. Beyond that, they do little to protect Russia’s market share, since its customer base has shrunk so dramatically this year. It’s silly to frame this decision as a Saudi favor to Russia. This is about the bigger picture and a teetering global economy,” he added.

As Russia tightened its energy chokehold on Europe in recent months, natural gas prices shot through the roof, pitching Europe and much of the world into a grave energy crisis that has fueled unrest and forced governments to declare emergency interventions in order to stabilise markets. 

With emerging market economies already struggling to cope with soaring energy prices and costs of living, the White House and experts warned that OPEC’s move will have a particularly harsh effect on nations that are hostage to global oil prices.

“Rising energy prices always have a nastier impact on the developing world, sadly,” Gross said. “And in the atmosphere we have right now, with a rising dollar, which makes those prices even relatively higher, no question this is particularly hard on the global south.”