Dissecting the OPEC+ Oil Cut | Opinion

The decision last week by the Organization of the Petroleum Exporting Countries (OPEC) and its Russia-led partners to reduce oil production was the last thing the United States wanted at a time when global crude supply remains tight. But it also serves as a reminder to U.S. officials and energy consumers everywhere that, ultimately, OPEC+ is a highly self-interested entity that makes oil policy based on what is in its own best interest. This, more than anything else, including staying on Washington's good side, will ultimately determine how much crude is pumped into the market.

Slashing output by 2 million barrels per day, or approximately 2 percent of the world's overall supply, was greeted in the U.S. with extreme unease. The Biden administration, which spent weeks dispatching key foreign policy and energy officials in a bid to lobby partners in the Persian Gulf to oppose the cut, were suddenly forced to defend why President Joe Biden's controversial July trip to Saudi Arabia was necessary. The denunciations were swift; in a joint statement, National Security Adviser Jake Sullivan and National Economic Council Director Brian Deese slammed OPEC+ for making what they termed a "shortsighted" decision. President Biden expressed his disappointment a day later. Lawmakers were far less diplomatic, with Senate Foreign Relations Committee Chair Bob Menendez emphasizing he will freeze any U.S. cooperation with Saudi Arabia in retaliation.

Recognizing that a cut of such large proportions could yet again push global oil prices above $100 a barrel, the White House is deliberating their options. More releases from the Strategic Petroleum Reserve are likely, if only to show the American public that the U.S. government is doing what it can to mitigate the price impacts of OPEC+'s latest move. More controversial measures, including but not limited to a temporary ban on U.S. fuel exports and even support for potentially suing the oil cartel at the World Trade Organization, are also on the table.

Regardless of what the U.S. does, it would behoove policymakers in Washington to not be surprised whenever countries like Saudi Arabia, the United Arab Emirates, Kuwait, and Russia coordinate among themselves to control supply of one of the world's most crucial commodities. This isn't the first time a cut of this magnitude has been instituted, and it's highly unlikely to be the last.

U.S. officials are understandably upset, for higher prices will hit American consumers the most. Before OPEC+'s announcement, the average price for a gallon of regular gas in the U.S. was $3.78, approximately 25 percent lower than it was in mid-June. Brent Crude, the international benchmark, dropped from $127.98 a barrel on March 8 to around $91.80 a barrel on Oct. 4, a decline of more than 28 percent. All of this provided at least some relief during a period when inflation was hovering above 8 percent.

OPEC+, however, isn't in the business of helping average Americans save money at the pump—it's in the business of maximizing their profit margins and ensuring their budgets are flush with revenue. Saudi claims of maintaining a sense of long-term stability in the oil market aside, the reality is the kingdom and its partners in the group were tired of watching prices fall and were increasingly concerned about the potential for a global recession, which would result in less demand for oil and therefore an abundance of supply. Lower revenues translate into smaller budgets, and smaller budgets translate into governments having to tackle tough decisions, like whether to reduce overall spending to compensate for a tighter balance sheet. For countries like Saudi Arabia and Russia, where the state is responsible for employing a significant portion of the population and underwriting subsidies on everything from energy to animal feed, spending cuts are not an appealing option.

While members of the OPEC+ will never admit it publicly, the fact is the group has gotten accustomed to the big returns generated by high oil prices. Aramco, the Saudi state energy giant, posted $48 billion in revenue during the second quarter of the year, a 90 percent increase from the same period in 2021. Russia was earning more money (nearly $100 billion between late February and early June) from oil exports even as export volume fell due to U.S. and E.U. sanctions. The good times, however, were starting to slip away, particularly for Russia, whose budget surplus almost disappeared last month as a result of lower energy revenues. Considering Russian President Vladimir Putin is in the midst of an expensive eight-month war that won't be ending anytime in the foreseeable future, this was an unsustainable fiscal development that needed to be addressed.

The one saving grace for the U.S. is that OPEC+'s 2 million barrel per day cut is more likely to be in the range of 1 million barrels per day. Because the organization has been unable to meet its production quotas, the actual real-world implications of last week's decision will be less dramatic.

But the larger point still stands: U.S. officials need to stop being shocked when the organization flouts Washington's demands. Such conflicts are literally the cost of doing business.

Daniel R. DePetris is a fellow at Defense Priorities and a foreign affairs columnist for the Chicago Tribune and Newsweek.

The views expressed in this article are the writer's own.