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The oil cartel’s decision to unexpectedly cut production before the US elections felt like a geopolitical shift. How has it built its influence?

The gesture was termed “fist bump diplomacy”. In July, President Biden's knuckle touch with Saudi Arabia's crown prince, Mohammed bin Salman, was intended to shore up the US leader's chances in the midterm elections by influencing US gas prices. The last thing the US expected was the crown prince's knuckles to strike America's government between the eyes. 


In a shocking about-face in early October, the Saudi-dominated oil cartel OPEC opted to cut rather than increase production before the elections, causing gas prices to rise. Perhaps Bin Salman was tired of four years of bad publicity from the west after the murder of US-based journalist Jamal Khashoggi by Saudi operatives. (Also, he preferred the more supplicant Donald Trump, who was waiting to announce his re-election bid, to the taciturn Biden.) 

Whatever the reason, it was no small coincidence that the meeting at OPEC's Vienna headquarters, where the decision was made to cut oil production, was attended by Russia's deputy prime minister. Oil has been a premium commodity in the west since sanctions against Russia took hold following its invasion of Ukraine. Russia needed an ally in OPEC for its reciprocal refusal to supply the west with gas to take effect. Cutting back production put a chokehold on supplies that reverberated worldwide, emphasising the cartel’s continued geopolitical clout.

Why was OPEC founded?


The Organization of the Petroleum Exporting Countries (OPEC) was created in Baghdad on 14 September 1960 to curb the power of seven US and British oil companies. The countries that initially comprised the organisation were Iraq, Iran, Kuwait, Saudi Arabia and Venezuela. Since then, others have joined: Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975), Angola (2007), Equatorial Guinea (2017) and Congo (2018). Since its inception, many countries have come and gone. However, OPEC's main oil producer and power broker is Saudi Arabia, which tremendously influences the world's oil production.  

How did OPEC influence the world economy in the 1960s, 70s and 80s?


In the 1960s, OPEC initially stabilised prices for its members, but its success also encouraged increased production, reducing them down the line. An oil crisis began in October 1973 when OPEC, led by the Saudis, initiated an embargo on countries that supported Israel during the Yom Kippur war. Among the countries initially affected were the USA, Canada, Japan, the Netherlands and the UK, where a three-day work week was temporarily introduced. 

Even after the crisis, oil prices continued to rise, causing oil-dependent countries in the west to form the International Energy Agency to help coordinate a collective response to major disruptions in the supply of oil. OPEC had effectively demonstrated how it could use its members' oil politically and economically against other countries. The Saudi decision to flood the market with cheap oil in the late 1980s undercut the Soviet bloc, which had previously failed to adhere to OPEC agreements, leading to the end of the Soviet empire.


The Iraq-Iran war (1980-88) undermined cohesion among OPEC members; it caused Saddam Hussein to lobby the organisation to increase oil prices to fund rebuilding and preceded the August 1990 invasion of neighbouring Kuwait. Price volatility caused by economic woes (the 2008 global economic collapse) and political unrest (Arab Spring, Iranian sanctions) plagued OPEC during the early 2000s. Increased oil production from the US, Canada, and other OPEC countries led by Saudi Arabia caused an oil glut between 2014-2016, resulting in an OPEC agreement to trim production in 2016, its first such move in eight years. 

Who are the most influential countries within OPEC?


Saudi Arabia – whose state oil company Saudi Aramco produces one out of every 10 barrels of oil worldwide – clearly wields the most clout. Historically, this has been because of its relationship with the US; it guarantees a certain amount of oil production in return for military protection, weapons and access to financial markets. But in the eyes of many, OPEC is a cartel in name only. While the Saudis stick to the organisation’s production mandates, the reality is that other members such as Nigeria, Venezuela and Iran pay little notice to OPEC statements and try to produce and sell as much oil as they can

Of OPEC's 13 members, other countries are important for different reasons. Iran carries influence because of its volatile relationship with the US and its combative stance on Israel and tensions with Saudi Arabia – both traditional American allies. Other Middle Eastern countries such as Iraq, Kuwait, and the United Arab Emirates are important because of their geopolitical position in keeping peace in the Middle East. Venezuela's importance is increasing because of the US’s need to maintain oil imports after the cessation of Russian supply because of the Ukraine war.


Aside from the 13 OPEC countries, 10 other oil producers formed a sister group, OPEC+, in 2016. Among them is Russia, whose influence and polarising presence has dominated recent OPEC discussions. Russia's invasion of Ukraine has split opinion and hastened the global move towards renewable energy.

How has Russia worked with Saudi Arabia to influence global oil prices?


Russia and Saudi Arabia agreed to extend the agreement to cut oil production in 2017 and again the two following years, forcing prices up. However, Russia refused to cut production by 1.5% in 2020, ending its three-year agreement with OPEC. Part of the reason was it felt the cuts – intended to keep OPEC producers in profit – were inadvertently propping up US oil production to the detriment of everyone else. 


In 2021, Saudi Arabia, the United Arab Emirates and Russia spearheaded a plan for all OPEC members to increase output by 400,000 barrels per day each month starting in August. The idea was to gradually offset the previous cuts made due to the COVID pandemic. 

But Russia's invasion of Ukraine sent the world into a global energy crisis. This precipitated the decision to cut production before the recent US midterm elections, angering the US and aiding Russia, potentially weakening Joe Biden's political position.

Do OPEC's recent cuts mean a turning point in its relations with the US?


The immediate political reaction to OPEC's decision to slash oil prices against the wishes of the US government was met with talk of immediate reprisals. Senator Chris Murphy (D-CN) said the US Arab allies chose Russia and China over the US. Senator Robert Menendez (D-NJ), chair of the Senate Foreign Relations Committee, suggested a freeze on Saudi cooperation on arms sales and security. Representative Tom Malinowski (D-NJ) echoed a previously suggested Republican bill to remove US troops and defence systems from Saudi Arabia.


However, a more nuanced approach has been suggested by others. Samantha Gross, director of the Energy Security and Climate Initiative at the Brookings Institution, has suggested rapidly falling oil prices were in fact at the heart of the production cut, not a snubbing of the Biden administration. The move may not necessarily signal a loss of influence for the US. Firstly, Russia's self-inflicting harm is distancing allies and hurting them economically. Secondly, the midterms were not the wipeouts that the Democrats feared; if anything, they harmed former president Trump's standings, and the results, along with OPEC’s cuts, didn't have a huge impact on gas prices. Thirdly, the OPEC announcement that it was cutting oil production by 2 million barrels per day will not happen because many members, including the Saudis, were not meeting their quotas anyway; half that number is more realistic.


Cooler heads at OPEC and within the White House will look at the big picture. The west's imminent shift away from fossil fuels, particularly with the advent of electric cars, will dramatically affect the relationship, limiting America's dependence on petrostates. Unsurprisingly, Saudi Arabia is trying hard to keep oil at the centre of the global economy by lobbying, funding research and trying to block climate research. Interestingly, Saudi Aramco has collaborated with the US Department of Energy to develop more efficient gasoline engines. 


However, the writing is on the wall. The Paris Climate Agreement's ambitious plans to cut carbon emissions and limit the world's rising temperature hinges on renewable energy taking centre stage. Even with its decades of influence, OPEC could be powerless to stop it.

Written by: Olivium staff


References:

Forbes: What was Russia thinking in refusing to cut oil production?

New York Times: Biden’s fraught Saudi visit garners scathing criticism and modest accords

Bloomberg: Russia’s Novak set to attend OPEC+ meeting in Vienna

Washington Post: If OPEC is a cartel, it’s not a very good one

Reuters: Venezuela’s October oil exports tumble on weaker production

New York Times: Inside the Saudi strategy to keep the world hooked on oil

NPR: Biden eases Venezuela sanctions as opposition talks resume

NPR: The US is trying to mend ties with Venezuela. One big reason? Oil

World Bank: What triggered the oil price plunge of 2014-2016

CNN: Oil price crash could get even worse in 2016

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