The struggle for control of the global oil market

Joe Biden’s punching visit to Saudi Crown Prince Mohammed bin Salman was always a questionable exercise. Three months later, the US president’s reward was not the hoped-for increase in oil production, but a headline cut of 2 million barrels a day by the Opec+ group, which has linked the oil cartel to Russia since 2016. Five weeks before the US midterm elections, in which gas prices could play a crucial role, that looks like a snub. It also suggests that Saudi Arabia is sticking to its ties with Moscow even as Vladimir Putin escalates his war in Ukraine. The kingdom may feel it is acting in its own interest and in the best interests of the cartel, but its actions could prove to be a strategic blunder.

Saudi and Opec officials insist the cuts were not politically motivated. With a likely recession in Europe and elsewhere that will depress demand, they are looking to cut prices, protect revenue and increase capacity. Likewise, after falling by a quarter since June, global crude prices are well below the sky-high levels reached by natural gas and coal thanks to the Russian war.

But the move to reduce production now is part of a broader struggle for control of the global oil market. Saudi Arabia is angered by US attempts to influence prices. The Biden administration has pushed for price caps on Russian oil from the major G7 and EU democracies to squeeze Moscow’s revenues. Opec sees this as an attempt to shift the balance of power towards consumer nations and fears such a mechanism could one day be used against them.

The US has also engaged in the largest-ever release of its strategic petroleum reserve to try to squeeze crude prices and gas prices at US gas pumps — an intervention as severe as OPEC’s fresh cuts. Releases sometimes ran at around 1mn b/d, which is about what Opec’s cuts will be when accounting for some members’ underproduction compared to their quotas.

The cartel is trying to regain control of the market and demonstrate that it still has the power to set the price. Saudi Arabia is certainly also involved in providing political signals to a US President, who dubbed it a “pariah” after the brutal assassination of journalist Jamal Khashoggi, and a government that he believes is in place insufficient support on the security of Riyadh in the region. It is to show that it has other friends in Beijing, New Delhi and Moscow.

The Saudi crown prince risks overdoing his hand, as he has often done in the past. China, India and Russia are unlikely to extend to Saudi Arabia anything remotely the same security protections that the US has practiced for several decades. Soaring oil prices now could only deepen a looming recession and the resulting demand destruction. An irate White House has hinted it could now release even more oil from America’s stockpiles. US lawmakers are calling for the revival of so-called Nopec legislation aimed at cracking down on oil cartels.

The lesson for the US and Western allies is that their Gulf partners are untrustworthy when it comes to energy, and Opec is determined to maximize revenue from an asset that demand for is eventually being eroded by Western-led efforts to recover combating climate change must be reduced. In the meantime, it sees no obligation to offer its customers energy security at low cost.

Western consumer nations have few short-term, supply-side answers other than investing in continued fossil fuel production, which would run counter to their climate goals. The long-term answer to all the multiple energy and climate problems they now face is the same: to make real efforts that have barely begun to reduce oil demand – and accelerate the move to sustainable, green sources.

https://www.ft.com/content/96265599-5f0c-4cbe-b508-c4900c380224 The struggle for control of the global oil market

Adam Bradshaw

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