OPEC Decision: Crude Diplomacy
The outrage at the decision of OPEC members to act in their own long-term interests says much about the petulance, arrogance and infantile mindset of our own political and media elite.
The response of the United States government and media to the decision of OPEC+ to reduce oil production by two million barrels a day has verged on hysterical. The Guardian reported that the White House had reacted with “anger” to the decision. CNBC, the American business news channel, also wrote that the Biden Administration had responded “angrily” to the announcement, adding that it would now “consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices.”
Meanwhile, at the OPEC press conference to explain the decision, CNBC journalist Hadley Gamble emotionally addressed Prince Abdulaziz bin Salman Al Saud, Saudi Arabia’s oil minister, saying: “There is a huge narrative coming from the West right now that OPEC – as you say a band of brothers but as they would say a cartel – is attempting to hold the world hostage, just as Vladimir Putin has done.”
In fact, the decision of OPEC+ was entirely in keeping with the national interests of its members, was entirely consistent with the macroeconomic (and thus the oil demand) outlook and, ultimately, was probably good for us, too. It is true that in the short term the decision is likely to cause some pain in Western nations due to our foolish energy and foreign policies; however, the fact Washington’s political and media class appear to be outraged that Saudi Arabia has prioritised its national interests over saving us from our own idiocy suggests that our elites suffer from the arrogance of infants who think the whole world revolves around them because they are insulated from the realities of life.
The Organization of Petroleum Exporting Countries lowers or increases the supply of oil to manipulate its price, preferably to levels that importing nations can afford but which also allow OPEC members to maximise long-term profits and encourage the investment needed to develop future supply. The most important part of this calculation is the global macroeconomic outlook. If economic activity falls, the demand for oil declines; if GDP is surging, demand increases.
At present, most economists appear to believe that Europe is likely to suffer a sharp recession (at least) and that there are elevated risks of a synchronised global downturn. Given the G7 and EU nations together account for more than half of oil imports, prices have fallen precipitously to extremely low levels during recent recessions in the West – as little as $30 a barrel, and during the Covid lockdowns, even to negative prices (that is to say, owners of oil had to pay buyers to take it off their hands) for a brief time.
Risking a rerun is obviously not in the interests of oil exporters – and it is probably not in our interests either. At $30 a barrel, few investors would want to pump hundreds of millions of dollars into the development of the new oil fields needed to replace depleting older sites and keep up with trend global economic growth. This would mean that when economies recovered, a shortfall would eventually appear in the global oil market, sending the prices of key benchmarks rocketing. In turn, these high prices would lead to ‘demand destruction’, where marginal consumers of oil could not afford to buy it or its derivative products. In everyday language, factories would shutter and we would stop driving and travelling by aeroplane as much.
This problem is particularly acute at present, because the low hanging fruit of the oil extraction business has been picked: untapped oil is no longer found seeping through the topsoil in Texas or Western Siberia. Most significant new wells must therefore be sunk into harder-to-get fields – in the high Arctic, on the deep sea shelf, or which require horizontal drilling or other marvels of modern engineering.
Such ‘tight’ oil fields are, of course, far more expensive to develop, and therefore require a higher oil price to garner investment. Steve Davies, the Head of Education at the Institute of Economic Affairs, told Bournbrook that an oil price consistently over $120 a barrel would be needed to develop these fields. If we want access to oil – and we very much do, because our whole modern economy (and thus lifestyle) still rests on it for manufacturing, transport, machines, chemicals, plastics and more – then we must have prices stable over $100.
Therefore, OPEC's decision to cut production ahead of a likely recession is not only in the interests of OPEC member states, but probably also in our interests, because it is at least an attempt to avoid another cycle of whipsnap oil price gyrations and thus to secure the future investment needed for stable long-term oil supply.
This, as we have seen, is not the view of the Biden Administration or the broader Western media class. President Biden has in fact been trying to reduce oil prices in an effort to aid the Democrat Party’s chances in the midterm elections.
First, he has been rapidly drawing down the US Strategic Petroleum Reserve, the huge stores the US keeps for emergencies such as war. On 29th September, The New York Times reported that the Biden Administration had authorised the release of some 160 million barrels of oil since March, taking the SPR to its lowest level in forty years, a policy Kevin Book, the managing director of ClearView Energy Partners, a consulting firm in Washington, called “Risky.” He added that “This policy can only last until the stockpiles are exhausted, and replenishing the stockpiles would take years.”
Secondly, in parallel, President Biden and senior US diplomats have been aggressively lobbying Saudi Arabia to increase oil production and have even eased the strangulating regime of sanctions the United States maintains on Venezuela.
Yet the energy and foreign policies of the Biden Administration have, like those of many other Western governments, been directly at odds with the aim of reducing oil prices. Upon entering office, President Biden signalled that he would prioritise green energy, and took steps in this direction, such as cancelling the Keystone XL pipeline from Canada to the United States. Anne Bradbury, the CEO of the American Exploration and Production Council, told Fox Business yesterday that the administration was “pursuing policies that make it harder to produce energy here in the United States.”
Meanwhile, during his presidential campaign, Mr Biden promised to turn Saudi Arabia into a “pariah” state in response to the assassination of the journalist Jamal Khashoggi. Until Russia invaded Ukraine, bringing energy security to the fore, the White House seemed to make little attempt to warm relations with Mohammad bin Salman, the Crown Prince of Saudi Arabia, whom the US accuses of ordering the gruesome murder of Mr Khashoggi.
Simultaneously, the Biden Administration significantly increased pressure on Russia in Ukraine. In 2021, in addition to its ongoing arming and training of the Ukrainian Armed Forces, Washington signed the ‘U.S.-Ukraine Charter on Strategic Partnership’, which pledged to deepen US defence cooperation with Ukraine. The same year, the US participated in the joint training exercises ‘Sea Breeze’ and ‘Rapid Trident’ in Ukraine to enhance interoperability between the two militaries.
Indeed, US pressure on Russia, through increased military involvement in Ukraine and the sanctions it imposed after Moscow's 2014 annexation of Crimea, might well have pushed the Kremlin into the arms of OPEC. Until 2016, Moscow had refused to participate in OPEC production decisions, which in effect allowed it to freeride on the efforts of Saudi Arabia to stabilise the oil market: Russia could pump as much oil as it wanted and still benefit from high prices because the Saudis were willing to sacrifice their own production to keep the market afloat. By bringing Russia, one of the world’s top three oil exporters, into the OPEC+ fold, OPEC (really Saudi Arabia, as the key OPEC Producer) now has significantly more power to set market terms.
In turn, the Saudis have moved closer to Moscow due to the aforementioned frosty relations with the Biden Administration, which also encompass the latter's determination to move forward with a new Iranian nuclear deal, the failure of the US to remove Bashar al-Assad from power in Syria after Russian intervention turned the tide of the war, and perhaps even the inability of US-supplied air defences to protect Saudi oil facilities from Houthi drone attacks.
In the past, the United States was always careful to maintain good relations with Riyadh, which meant Washington enjoyed considerable influence over Saudi decisions. Philip Pilkington, the economist and writer, highlights that in 2014 President Barack Obama was likely behind the Saudi decision to flood the market with oil in the run-up to the US elections: “By the time the midterms rolled around that year on November 4th, the oil price had fallen around 28% from its peak in June.”
Yet now that a proxy war between the US and Russia has erupted in Ukraine, and oil prices are rising due to fear that Western sanctions might lead to a reduction of supply, the Biden Administration has found itself trapped by its previous attempts to please the Manhattan charity auction set on Saudi Arabia and the environment.
The Western political elite is learning that it can either pursue green energy policies at home or enrage and punish the world’s major oil producers. It cannot do both if it wishes to manage the cost of energy and therefore the economic viability of the Western world while it transitions to a low carbon economy.
The outrage at the decision of OPEC members to act in their own long-term interests says much about the petulance, arrogance and infantile mindset of our own political and media elite. If Washington continues in this manner – for instance, by pursuing a Senator Edward Markey proposal to take OPEC to a WTO tribunal, or by reviving the so-called NOPEC Bill to make OPEC prosecutable under US antitrust law – it will only get worse. The US, the cornerstone of Western diplomatic and military power, is looking evermore strategically stretched, simultaneously picking fights with China, Russia and now seemingly the other major hydrocarbon exporters beyond Washington’s long-standing bête noires, Venezuela and Iran.
In a recent panel discussion, Subrahmanyam Jaishankar, India’s Minister of External Affairs, faced similarly high-handed demands that India act against its own interests to sanction Russia. He responded by saying that the West would have to grow out of the mindset that its "problems are the world’s problems but the world’s problems are not" its. The sooner we understand this, and that our actions have consequences, the better.
ADM Collingwood writes and edits BritanniQ, a newsletter for intelligent Britons. To find out more, and subscribe free of charge, click here.
