Why is Saudi Arabia reducing its oil production?
The decision by OPEC+ to cut two million barrels a day of oil production has sparked angst in the West, in particular with the Biden administration, who advised the Saudi government that its actions may be interpreted as a nod of support to Russia. There are reports suggesting the UAE, Kuwait, Iraq and Bahrain privately opposed the production cut, but ultimately went along with Saudi Arabia to preserve unity. Saudi authorities have stated it was a consensus among OPEC+ member states.
The production cut raises the price of oil globally to Russia's advantage, which ultimately strikes at European and US efforts to sanction Russia and undercut its ability to fund the war in Ukraine. The production cut also strikes directly at US policy efforts to short-circuit inflation at home, and will likely worsen global inflation (the paradox of greater inflation via high oil prices is the potential of a recession that ultimately reduces demand).
For all latest news, follow The Daily Star's Google News channel. Why did the Saudi authorities reduce production, despite receiving US advice to the contrary?
Abraham Accords reduces need for US troops
The formalisation of the UAE-Israel relationship coupled with strategic (though not usually "open" and documented) cooperation with Saudi Arabia (e.g., the Middle East Air Defense system) will reduce the required level of US regional involvement. The US is also less needed as the third party negotiator and/or facilitator of efforts to combat the three countries' common enemy Iran. Finally, Russia and China have seized an opportunity to step in and engage the UAE and Saudi Arabia on security and trade.
The Abraham Accords consequently are an example where policy success may ultimately help and hurt the US – less troops and resources in the Middle East is a good outcome for the US, but losing political and economic leverage may not exactly be what policymakers imagined with this policy.
The US made a mistake on oil policy
If the US wants to avoid being at the mercy of OPEC+ decisions on oil, it should better manage its local production. Oil production hovers around 12 million barrels a day, compared to 12.3 million barrels a day in 2019, with output expected to average about 12.6 million barrels a day in 2023, according to the Energy Information Administration.
The five percent bump in 2023 production will be welcomed by the Biden administration. However, the administration may have to agree with producers on providing support in response to Biden's request for more output. Otherwise producers will remain cautious about quickly ramping up and facing a price bust similar to 2020.
The production cut is not as much as it seems
Current estimates of OPEC+'s September production suggest that, collectively, the group is lagging behind its planned production level by approximately 3.6 million barrels a day. As a result, only eight of the 23 OPEC+ countries will have to reduce their production for a total of 890,000 barrels a day. About 87 percent of the reduction will come from Kuwait, Saudi Arabia and UAE.
The other five countries (Algeria, Gabon, Iraq, Oman and South Sudan) are likely to be unreliable. Gabon has only met the cap once since May 2020 (when the bloc agreed on current production levels). South Sudan has exceeded its quota every month since 2020 and never cut its barrel of production during that same time period. And Iraq's national oil minister suggested the country will stay at the same level of oil exports going forward, thus it would have to reduce domestic consumption (which is politically unpalatable in Iraq).
The Saudi 2030 vision is expensive
Lastly, the Saudi 2030 Vision comes with a hefty price. The transformation plan, with its focus on a post-hydrocarbon age, will cost in the trillions. Although the exact number is opaque to most observers, a look at the Neom development project provides directional indication: This smarty city, to be constructed in Tabuk Province, will cost an estimated USD 500 billion alone.
US policy suggestions, like the No Oil Producing and Exporting Cartels (NOPEC) Act, which gather backing (and votes) every time oil prices rise and lose steam when prices fall, will not solve the problem.
Maybe it is time for the US and Saudi authorities to be open on the changing dynamics of their relationship. It is no longer a simple story of oil, security, and a history of political alliance. The relationship will have to evolve beyond a marriage of necessity or, it will die with the two parties constantly talking past each other.
Kurt Davis Jr is an investment banker focused on developed and emerging markets. He can be reached at kurt.davis.jr@gmail.com
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