Advertising at The News And Times – advertising-newsandtimes.com | WE CONNECT!

Advertisements – Advertising at The News And Times – advertising-newsandtimes.com | WE CONNECT!

Audio | Video | Top News | On Twitter | Security | FBI | Capitol Riot | JOSSICA | Trump | Russia | Putin | Russia – Ukraine War | Covid-19 | Brooklyn NY | Puerto Rico | World 

The Disease X-19

December 8, 2022 2:31 am

The News And Times | Featured Posts | All Articles | Current News | Selected Articles | Shared Links | Opinions | In My Opinion | Sites | Blogs | Links | Twitter | Facebook

Categories
Selected Articles Review

Why OPEC’s cuts shouldn’t have been a surprise — and may not hurt as much as you might think


Listen to this article

Saudi Arabia’s Minister of Energy, Abdulaziz bin Salman, speaks during a press conference after the 45th Joint Ministerial Monitoring Committee and the 33rd OPEC and non-OPEC Ministerial Meeting in Vienna, Austria, on October 5.  | Vladimir Simicek/AFP via Getty Images

A Q&A with Samantha Gross of the Brookings Institution on what OPEC’s cuts mean and where things might go from here.

Ignoring months of lobbying by the White House, Saudi Arabia and other US allies in OPEC+ moved last week to slash the amount of oil on global markets. The countries of OPEC+ — a cartel of oil-producing nations — announced on October 5 that they would be decreasing the cartel’s production quota by 2 million barrels per day. The decision will likely drive up energy prices, causing more pain for an already slowing global economy.

US officials expressed acute frustration with the cuts. President Joe Biden this week said there would be “consequences” for Saudi Arabia. The decrease looks like a “smack in the face” to the president, one energy analyst said, after Biden traveled to Riyadh in July and memorably fist-bumped Saudi Crown Prince Mohammed bin Salman — a controversial gesture amid reports that MBS had ordered the 2018 killing of Saudi-American journalist Jamal Khashoggi.

Sen. Chris Murphy (D-CN) accused Washington’s Arab allies of choosing Moscow and Beijing over the United States. Sen. Robert Menendez (D-NJ), chair of the Senate Foreign Relations Committee, called for freezing all U.S.-Saudi cooperation, including a halt to arms sales and security cooperation. Rep. Tom Malinowski (D-NJ) said he would introduce a bill — previously proposed by Republicans — to remove US troops and defense systems from Saudi Arabia.

But such responses seem to miss a crucial point about OPEC+’s motivations. That’s what Samantha Gross, director of the Energy Security and Climate Initiative at the Brookings Institution, a Washington-based think tank, told me in a recent conversation.

Gross’s take is straightforward: Arab states are simply pursuing their self-interest in keeping oil prices high. She cautioned against seeing the OPEC+ decision as a choice by the group between the US and Russia. Today is not like the Cold War, when many Middle Eastern states balanced between Washington and Moscow, seeking to extract maximum benefits from both superpowers and hedging in case either bloc won.

Besides, although the cut might boost oil prices, Gross says the prospects for Russia’s future oil revenues are potentially quite dim, as the G7 and the European Union prepare to implement new measures that could substantially reduce Putin’s proceeds from oil. Moreover, the actual production cut is likely to be around 1 million barrels per day — not 2 million — because many OPEC+ members weren’t meeting their quotas anyway, according to Gross.

I spoke with Gross last week in the wake of OPEC+’s announcement. A transcript of our conversation follows, edited for length and clarity.

Michael Bluhm

Many in the United States see the OPEC+ decision as a slap to Joe Biden. Biden traveled to Saudi Arabia a few months ago and gave a fist-bump to Mohammed bin Salman (MBS), whom his own intelligence services say ordered the assassination of journalist Jamal Khashoggi.

But instead of shoring up relations, Saudi Arabia now makes a move that will almost certainly cause oil prices to rise — which will cause gas prices to go up, harming the US economy and perhaps the global economy.

Why would longtime US allies such as Saudi Arabia and the United Arab Emirates choose to do what Moscow is asking them to do instead of what Washington wants them to do?

Samantha Gross

There are several reasons. But we need to start by not framing this as the Saudis and, to a lesser extent, the Emiratis choosing between the Russians and the Americans.

Middle Eastern states have their own interests, and they were genuinely concerned about rapidly falling oil prices and over-producing as the world was going into a recession. They did what they do in those situations: pulling back production. They have their own interests and economies to look after. And they have agency. It’s not just choosing between the United States and Russia.

Both Saudi Arabia and the UAE are US allies, and we cooperate on many things. But the US relationship with Saudi Arabia, especially with MBS, is not as cozy as it was during the last administration. I am okay with that — I see a lot of things in this Saudi regime that I find alarming. Despite the fist bump that you mentioned, President Biden and Mohammed bin Salman are not as close as President Trump and Mohammed bin Salman were. Our influence there is lower. But the production decrease was primarily about these countries doing what they thought was in their own best interests.

I don’t think this is going to be a killer for the global economy, the US economy, or President Biden. The market doesn’t like the news, but oil prices haven’t skyrocketed. If Russian oil supply ends up declining quite a bit, these Arab countries may change their minds about decreasing production. But for now, they’ve done what they think is in their best interests — and that is a sensible reaction to market conditions. I don’t think it’s necessarily meant to be a huge finger in the eye to President Biden, although it might look that way.

Michael Bluhm

Where and how much are these OPEC+ production cuts going to affect the prices of gasoline and energy?

Samantha Gross

Oil is traded on a global market. The price isn’t the same everywhere — prices differ because of transportation and type and quality of oil. But we’re going to see the effect in prices of fuels everywhere.

I’m not sure how much of an effect it will have. Oil markets are tremendously uncertain right now. We might be entering a recession. That’s a great source of uncertainty.

Future Russian production is also very uncertain, as are the effects that sanctions will have.

A third wild card is that OPEC+ announced that they were cutting production quotas by 2 million barrels per day. But production is not going to fall by 2 million barrels a day because many OPEC producers weren’t meeting their quotas.

You’re not going to see a reduction of 2 million barrels a day — you might see half that. Two million barrels sounds like a big number, and they wanted the market to see a big number. But production isn’t going to fall that much.

It’s really difficult to look at past decreases in production and figure out what people might see at the pump. Conditions are different every time, and the conditions this time are particularly different and particularly uncertain.

Michael Bluhm

OPEC+ clearly wants oil prices to rise. But higher oil prices would mean more oil revenue for Vladimir Putin, which would help fund the war in Ukraine. What could this cut in production quotas mean for Russia and Ukraine?

“For the time being, Russia is certainly happier to see higher oil prices”

Samantha Gross

I’m sure that the Russians were in OPEC+ arguing for a decline in production, but Putin’s future oil revenues depend on a lot of other things. The bigger questions for Russian production are upcoming European sanctions and the American proposal to put a global cap on the price of Russian oil.

That’s the big deal, and the bigger of the two for Russia is the price cap — what the cap is and how well it works. For the time being, Russia is certainly happier to see higher oil prices. Their oil is selling at a discount now because people don’t want to buy it.

After European sanctions go into effect in December, it will become more difficult to buy Russian oil. Those sanctions forbid EU and UK companies from shipping, financing, or insuring Russian oil. That would put a real dent in Russian oil’s ability to reach the market.

Michael Bluhm

Enforcing a global price cap is daunting, but even the countries that don’t participate could have more leverage to demand below-market prices from Russia.

Samantha Gross

And if that happens, that is considered a success for the policy. People at the Treasury Department understand that that’s going to happen, regardless of whether countries formally participate in the policy. They’re like, “Lowers Russian revenues? Works for us.” Those are intended consequences.

Michael Bluhm

You say that the production decrease might not do much damage to the global economy. Why do you say that? Are there other potential sources of oil to make up the shortfall from OPEC+?

Samantha Gross

There’s not an obvious source of new production to fill in the cuts. The question is where demand is. No new oil is immediately going to replace those cuts. If oil prices are high and stay high, then you’ll see additional production — particularly from the United States, where we can increase production quickly.

But the open question is much more about demand. Where will demand go in light of the global economy, supply chain issues, the potential slowdowns in Europe due to Russia’s cut-off of natural gas, and a slowdown in China?

Michael Bluhm

Biden has said that his trip to Saudi Arabia in July was not primarily about oil. Even though he talked about oil, the trip was intended to promote US goals in the region, especially the normalization of Israel among Arab countries.

Samantha Gross

He was asking for a production increase from the Saudis, but he was never going to get that because the Saudis didn’t have more oil to give.

Michael Bluhm

Energy analysts have made a couple arguments about the effects of Russia’s invasion of Ukraine.

One is that the invasion will drive up oil and gas production in the United States as companies try to replace the Russian imports that European countries want to stop buying. Another argument is that the war will accelerate the drive to develop renewable energy as governments move to decrease their reliance on dangerous petro-states such as Russia and Saudi Arabia.

Samantha Gross

I don’t think those two options are mutually exclusive. The world has already been focusing on the energy transition away from fossil fuels.

Russia is shooting itself in the foot with its current behavior because Russia, as the world’s largest energy exporter, was going to have problems anyway. By invading Ukraine, they’ve taken that challenge and moved it forward in time. And they’ve made it steeper because now the world is trying to specifically cut out Russian fossil fuels, particularly in Europe. And Russia isn’t well-suited to sell oil to the markets that still want its oil because of shipping and location.

US oil and gas production are expanding now in response to the market, but I don’t think that’s necessarily anathema to an energy transition here or anywhere else. We have to feed the energy system that we have today. While we make the transition away from fossil fuels — or while we are working on getting away from Russian fossil fuels — we’re going to need something to fill in.

Both things can be true: increased US fossil-fuel production and a faster transition away from fossil fuels. It may be environmentally advantageous to transition by temporarily increasing US production because we have stricter environmental standards than the Russians do. We release much less methane from our natural-gas production, for instance. A switch from Russian fossil fuels to American fossil fuels, as we transition, could be a net positive for the climate, as long as we don’t lose track of making the transition.

That’s a nuanced answer, but you have folks who say, “We shouldn’t be producing any fossil fuel here.” As long as we’re using fossil fuel, we should produce it here because we can do better. Russian fossil fuel is a mess, so it’s not bad to replace it.

“Our relationship is not entirely based on [Saudi Arabia] being our gas station”

Michael Bluhm

How might the cut in production quotas affect relations between the Biden administration and Saudi Arabia and the UAE?

Samantha Gross

I don’t think this production cut is necessarily a positive for our relations, but our relations encompass a lot more than oil. The US and Saudi Arabia are strategic partners in the region for other issues, particularly terrorism and Israel. Our relationship is not entirely based on them being our gas station.

President Biden said that his recent visit to Saudi Arabia was in large part about Israel, and we have been working with them a lot to cooperate more closely with Israel on mutual interests. That’s an important part of our relationship.

They’re very imperfect partners. We don’t always agree. Very seldom do we have an ally with whom we agree with on everything. But we find where our interests align, and we work together. This is an area where our interests are diverging, but I don’t think it ends the relationship. We continue to cooperate on the things we agree on.

Michael Bluhm

How much leverage does the US have in talks about oil with Saudi Arabia?

Samantha Gross

We have more leverage than we used to because we produce a lot more oil. It used to be somewhat true that we relied on them. The world market relies on them for oil, but the fact that the United States is the world’s largest oil producer — and an oil exporter — now makes us a different kind of player. It changes the relationship; it makes the US more powerful, not less.

But then you have folks in Congress saying, “Why are we even talking to them when we’re the world’s largest oil producer? Biden, if you ‘drill, baby, drill,’ you wouldn’t have to talk to them.” No, that would never be true. Oil is a global market. But we occupy a very different place in that global market than we used to.

And instead of these higher oil prices all going into our foreign expenditures, we’re keeping some of them now. The dollars recycle in our economy, not theirs. High gasoline prices are incredibly unpopular politically, but they’re a lot easier for the US economy than they used to be because we get to keep some of the money.

Michael Bluhm is a senior editor at The Signal. He was previously the managing editor at the Open Markets Institute and a writer and editor for The Daily Star in Beirut.