Russia and China violated the US-Saudi oil agreement

Relations between the Saudis and the Americans deteriorated, and China and Russia took advantage of this. The OPEC+ cuts in oil production are a consequence of this, and new shocks may follow. Here’s what happens

The oil cooperation between Russia and Saudi Arabia, the partner of reference for the United States in the Middle East, poses a danger to the American economy and also to the political fate of President Joe Biden, who intends to run again in the 2024 elections. bloombergAnd the recent decision of OPEC+ (a group of oil exporting countries led by Riyadh and Moscow) to cut crude oil production by 1.6 million barrels per day may be “just the beginning.” It is reasonable to expect new shocks, that is, because the “oil for security” agreement concluded between the Americans and the Saudis in 1945 seems to have collapsed.

The impact of cuts on the oil market

The announcement of the cuts had the effect of pushing oil prices up by $5 a barrel. Exacerbation of market “tightness”—that is, the delicate balance between supply and demand levels—may increase inflation and the risk of a recession: consumers will spend more money on energy, and have to save on less important goods and services. At the same time, the Kremlin could see its revenue grow and use it to finance the invasion of Ukraine.

Geological calculations and material needs

In addition to the value of crude oil, cooperation between Saudi Arabia and Russia is important because it represents a shift in geopolitical alliances: Riyadh is moving away from Washington’s orbit to coordinate with Moscow on oil; And it relies on Beijing, the great American adversary, to facilitate relations with Iran, the historic regional adversary. As a result, the West’s ability to influence OPEC+ decisions “is at its lowest point in decades,” he writes bloomberg.

Besides geopolitical calculations, there are also purely economic reasons behind the cuts. Russia under Vladimir Putin needs higher oil prices, around $100 a barrel, to support its budget and pay for the war against Ukraine. On the other hand, Saudi Arabia under the leadership of Mohammed bin Salman is exploiting oil revenues to finance its multi-billion dollar plans for economic transformation: it needs prices per barrel of between $75 and $80 to support public spending.

The situation in the United States

The United States is the world’s largest oil producer, but its economy is free and unplanned: the government cannot therefore order producers to adjust production in a particular direction. As a result, the White House could not count on the help of domestic industry oily Rock (This is the name of unconventional American oil extracted from shale rocks) to compensate for OPEC + cuts and supply barrels to the international market. American corporations have other goals to achieve, as they must respond to shareholders’ demands for financial discipline and high profits.

An increase in crude oil prices could also encourage some new drilling, but the shale sector is looking more to the near future than to the present: the green transition already promises to drastically reduce fossil fuel consumption, preventing oil companies from offsetting the costs incurred today to increase extraction capacity. However, higher oil prices and market volatility can accelerate rather than slow the transition to clean energy.

Some analysts – writes bloomberg – Expect oil prices to average above $80 per barrel over the next few years, which is much higher than the average oil price of $58 for the period 2015-2021.

Who wins (OPEC +) and who loses (Europe)

For the global economy, an oil shortage and price hike is a very negative scenario. Exporting countries will benefit, but importing countries – like most European countries – may experience lower levels of growth and higher levels of inflation.

On the one hand, the United States finds itself in an intermediate position: they are large producers and exporters, but the increase in fuel prices threatens the purchasing power of the population. According to accounts bloombergFor every $5 increase in the price of oil, the US inflation rate rises by 0.2 percentage point.

Is the American-Arab pact on the verge of collapse?

Deal oil for security A rift between the United States and Saudi Arabia began in 2018, with the murder of dissident Saudi journalist Jamal Khashoggi (he worked for the American newspaper). Washington Post) at the Saudi Consulate in Istanbul.

In 2019, Biden — who has not yet been elected president but is already determined to craft a foreign policy to promote democracy — said he wanted to make Riyadh a pariah state isolated from other countries.

In 2021, as soon as he assumed his position in the White House, he issued an intelligence report accusing Saudi Crown Prince Mohammed bin Salman of being responsible for the murder of Khashoggi.

In October 2022, OPEC + cut oil production by two million barrels per day, less than three months after Biden’s visit to Riyadh, with the aim of obtaining an increase in the supply of crude oil.

Last month, Saudi Arabia and Iran agreed to restore formal diplomatic relations: the agreement was brokered by China and signed in Beijing. Riyadh also decided to join the Shanghai Cooperation Organization, a group led by China (Moscow is also a member) that aims to compete with Western institutions.