A coalition of oil-producing nations led by Russia and Saudi Arabia announced Wednesday it will slash oil production by 2 million barrels per day, in a rebuke to President Biden that could push up gas prices worldwide, worsen the risk of a global recession and bolster Russia in its war in Ukraine.
The move by the Organization of the Petroleum Exporting Countries and its partners prompted a blistering reaction from White House officials and reverberated almost immediately through domestic and global financial markets, threatening higher energy costs for the United States and European countries already grappling with inflation and economic instability.
The cut to production also amplifies geopolitical tensions at a precarious moment for the world’s major powers. Biden administration officials had launched an extraordinary effort to press Saudi Arabia to produce more oil to compensate for the global shortage caused by Russia’s invasion of Ukraine, with the president personally visiting Saudi leaders in a trip to Jiddah. With this move, Saudi Arabia has rejected those entreaties at least in part, leaving senior White House officials contemplating their next steps and publicly hinting at unprecedented measures to undercut the gulf nation’s grip on international energy markets.
Russia will benefit from the cut, because lower production will increase the price of oil — helping Moscow finance its war effort in Ukraine. And it could further test Europe’s resolve to support Ukraine ahead of what economists project will be a sharp slowdown in economic growth throughout the continent. American consumers could also be strained by higher gas prices, potentially imperiling the Biden administration’s determination to lower gas costs ahead of the 2022 midterm elections.
This would be the first time the group cut oil production targets since the beginning of the pandemic. And it’s more aggressive than many analysts had expected even a few days ago. The OPEC Plus coalition, which is led by crude-oil giant Saudi Arabia, said the cut in production would take effect in November. OPEC Plus said in a statement the move was necessary to stabilize the recent fall in global energy prices.
“The President is disappointed by the shortsighted decision by OPEC Plus to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine,” U.S. national security adviser Jake Sullivan and National Economic Council Director Brian Deese said in a statement.
The statement added that the administration will consult with Congress on additional mechanisms “to reduce OPEC’s control over energy prices” — suggesting the U.S. policymakers could be interested in repealing a long-standing exemption to federal antitrust law that allows the consortium to effectively coordinate on prices. If executed, that move would in turn elicit fierce pushback from Saudi Arabia and its allies, analysts say.
Rep. Tom Malinowski (D-N.J.) on Wednesday said he would introduce legislation in response to the cut that would require the Biden administration to remove U.S. troops and missile defense systems from Saudi Arabia and the United Arab Emirates.
“This clearly portends the potential for higher oil prices, reinforcing recessionary forces in the global economy and heightening risks for global financial instability,” said Mark Sobel, a former senior Treasury Department official.
Energy stocks climbed slightly on the news, contrasting with declines in the financial markets. The immediate impact on gas prices remained unclear. Claudio Galimberti, head of Americas analysis at Rystad Energy, said gas prices are likely to increase in the United States perhaps by roughly 10 percent in much of the country, though the actual increase will depend on many factors.
“The intention of the OPEC Plus cut was to break the fall in crude prices since the summer,” said Bob McNally, an energy analyst at the Rapidan Energy Group. “If they succeed, then gasoline pump prices should also stop falling and range around current levels, until other market drivers impact the price.”
The cuts come despite aggressive lobbying by the Biden administration for the consortium to continue production at current levels or higher — punctuated by Biden’s visit to Saudi Arabia in July. Biden had earlier in his administration vowed to make Saudi Arabia an international pariah, but he re-engaged while trying to use all available channels to curb increases in the price of gas that had hurt his domestic approval ratings. The administration had sought to isolate Saudi Arabia in part because of its human rights record.
The production cuts could lead to considerable political fallout in the United States, where midterm elections will be held in just over a month. Falling gas prices this summer played a big role in lifting the political fortunes of Democrats, who face a tough election season. They also helped elevate Biden’s approval rating and gave the party a glimmer of hope for blunting a widely anticipated red wave in November.
The OPEC coalition’s move could also add to inflationary pressures in the United States and Europe, as well as undercut the effort to bolster Ukraine as it defends itself against the Russian invasion. Russia relies on gas and oil sales for a large portion of its budget and had pushed for the production cut, which will enable Moscow to sell oil for higher prices on the global market, generating more revenue for its war and troop mobilization.
Oil prices jumped this week in anticipation of Wednesday’s news. They are expected to increase further now, probably to over $100 per barrel.
The Biden administration waged a last-minute push to persuade Middle East allies not to dramatically cut oil production ahead of the meeting, according to senior administration officials who spoke on the condition of anonymity to discuss internal strategy. That effort, involving senior-level discussions with foreign counterparts, was seen internally as a long shot.
One White House official quibbled with the suggestion that the Biden administration had waged a major push to dissuade countries such as Saudi Arabia, Kuwait and the United Arab Emirates from cutting production, saying it was a “minor effort.” Other officials said it was a more significant push but acknowledged that Biden was not making calls on the matter.
“A large supply cut would delight Moscow, which would benefit from both stabilized if not higher crude prices and an implicit sign of solidarity from its OPEC Plus colleagues as it braces for looming E.U. oil sanctions‚” McNally said before the cut was announced.
The OPEC Plus coalition said it was making the move “in light of the uncertainty that surrounds the global economic and oil market outlooks, and the need to enhance the long-term guidance for the oil market, and in line with the successful approach of being proactive, and preemptive, which has been consistently adopted” by the group.
Before the OPEC Plus meeting, gas prices were already up sharply in some areas of the United States where there are several hotly contested congressional races, as well as close races for governor. Those increases were propelled by maintenance at refineries on the West Coast and a large fire at a refinery in the Midwest.
Nevada, Washington, Oregon and Alaska have all seen prices jump by at least 40 cents a gallon over the past week. Throughout swing states in the Midwest, the increase has been less severe, but enough for drivers to notice the pain. In California, where there are more than a half-dozen close congressional races, prices jumped 62 cents over the past week to $6.38 per gallon of gasoline.
While the White House has little control over the price of gas, which is guided by global markets, Biden has more actively engaged on the matter than many of his predecessors. That includes his order to release 1 million barrels of oil per day from the Strategic Petroleum Reserve, an action that helped lower prices but now makes the United States even more vulnerable to cost increases as it faces the challenge of replenishing.
The administration has already extended the release of that reserve oil into November. But the potential production cuts by OPEC Plus suggest the United States may not be able to restock at the lower prices administration officials had hoped.
“We will continue to take steps to protect American consumers,” White House press secretary Karine Jean-Pierre said Tuesday, ahead of the announcement. “Our focus — and it’s been very clear for the past several months — has been on taking every step to ensure markets are sufficiently supplied to meet demand for a growing global economy.”
She added, “Energy prices have declined sharply from their highs and American consumers are paying far less at the pump than they were several months ago.”
However, Sen. Chris Murphy (D-Conn.) told CNBC in an interview the cut in production should lead to a “wholesale reevaluation of the U.S. alliance with Saudi Arabia,” adding that Biden’s visit this year did not yield the necessary results from Riyadh. “When the chips are down, the Saudis effectively choose the Russians instead of the United States,” he said.
A new bill Wednesday from Malinowski and Rep. Sean Casten (D-Ill.) would also pull U.S. military forces out of Saudi Arabia, relocating about 3,000 troops. Malinowski and Casten called the cut to oil production a “hostile act.”
“It is time for the United States to resume acting like the superpower in our relationship with our client states in the Gulf,” a statement from Malinowski and Casten said.
The increasingly challenging realities of the global energy market are certain to raise tensions between the Biden administration and large oil producers. Biden and other Democrats have been repeatedly attacking oil companies for reaping record profits at a time when consumers are struggling to pay for a tank of gas.
Energy Secretary Jennifer Granholm has previously put oil companies on notice that the administration could use emergency powers to curb exports if the firms do not put more emphasis on boosting their domestic inventories. Oil executives and industry experts have warned such a curb on exports could backfire, tightening the global supply even further and discouraging investment in increased production.
As the OPEC Plus production cut loomed, the leaders of the American Petroleum Institute and American Fuel and Petrochemical Manufacturers sent Granholm a five-page letter on Tuesday warning that restrictions on exports “would likely decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.S. allies during a time of war.”
Evan Halper, Adela Suliman and Amar Nadhir contributed to this report.
