High prices, war in Ukraine, a cold winter ahead — and now OPEC+ piles on

Wanting to appear to be prophetic, many political pundits have spent the past couple of weeks fine-tuning (aka, hedging) their predictions for the midterms, while more recently pondering whether there will be a “Hurricane Ian effect” to also impact voter turnout. Then, “wham!” Just when the White House didn’t want it, OPEC+ piles on with reports that the oil cartel will cut 1 million barrels per day from its production.

The New York Times has the factual headline, “OPEC Plus considering major production cut to prop up oil prices,” but rather misses the point. That was caught by an early banner headline of the Financial Times — “Oil nations’ plans to slash output threaten to deepen energy crisis”— with a pithy sub-head right on the button: “Rift with US looms.”

The average voter may well be less analytical, knowing simply that cuts by OPEC+ (the shorthand for the old Saudi-led cartel, plus Russian-led oil exporters) means higher prices at the pump. In many places across the U.S., these have been falling, reflecting the drop in crude oil trading prices from about $120 to $85 per barrel of the Brent benchmark. But the effect is often uneven. Last weekend there was a $1.25 per gallon differential between what I pay for gas in Washington, D.C. and what I could have paid a few miles away in Virginia. According to reports, OPEC+ wants the world price to go back to at least $90.

As if an inflationary push is not bad enough, the mere suggestion that a cut is under consideration could be interpreted as a further blow to the already dubious success of President Biden’s trip to Saudi Arabia earlier in the summer. The fist-bump greeting between the president and Saudi Crown Prince Mohammed bin Salman was initially hoped to be depicted as less friendly than a handshake but instead it has been interpreted as being a sign of chumminess. But the visual served a purpose for Riyadh, slightly hiding the fact that MbS, as he is known, didn’t grant Biden’s main “ask”: a significant increase in oil production, which would prompt a weakening of the price.

The fall in price that did occur anyway reflected the slowdown in the world economy. And since then, the forecasts have only worsened. Hence, the predicted action by OPEC+, expected Wednesday, when the oil ministers meet in Vienna.

As for FT’s predicted “rift with the US,” this is a multi-dimensional problem. At its center is the Russian invasion of Ukraine, which is leading to what is expected to be a cold and uncomfortable winter for many Europeans. The sense in Washington that the Biden administration is disappointed in Saudi Arabia for its supposedly oil-based alliance with Vladimir Putin is almost palpable.  

Additionally, and coincidentally, Sunday was the fourth anniversary of the demise of the Saudi journalist and Washington Post op-ed writer Jamal Khashoggi at the Saudi consulate-general in Istanbul. On Monday, MbS’s lawyer in town applied for “status-based immunity” for his client, who faces civil action brought by Saudi dissidents. That status was a byproduct of MbS’s elevation last week to prime minister, which, by diplomatic convention, gives him “sovereign immunity” against legal action abroad.

The counter-spin to criticism of Riyadh is that the kingdom sees oil as a distinct file of its own, reflecting economic realities rather than diplomatic ones. Indeed, there are subtleties and the economic rationale worth noting. As it is, a 1 million-barrel-per-day cut reflects budget totals, rather than export figures. And several OPEC+ members no longer have the capacity to produce in the volumes to which they are entitled. But hopes that the cutbacks will be less than the headline figure have to be set alongside reports that some producers may go further. The Saudis also point out that they need to maintain, and even increase, spare capacity in anticipation of a supply crunch in coming months as many countries try to avoid buying Russian oil.

The possible impact of the action by OPEC+ could be felt by polling day in the U.S. By then we may have had a “Tom Clancy-moment” with regard to Putin’s apparent threat to add a nuclear dimension to the Ukraine fighting. It could be a rough few weeks.

Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.