Why does the U.S. want to punish Saudi Arabia for the OPEC+ Cut?


OPEC cuts crude oil production

Firstly, despite repeated please from the U.S. that the Organization of the Petroleum Exporting Countries (OPEC), under the leadership of Saudi Arabia, should not cut its collective crude oil production, it did just that.

Secondly, the White House said that a cut in crude oil production and the corollary rise in oil prices would lead to three outcomes that it sees as exceptionally dangerous for the world.

Thirdly, the cut’s immediate impact on crude oil prices was not as dramatic as some had feared.

Worldwide consequences

This cut may raise the energy price-led surge in global inflation that has prompted rising interest rates worldwide that are crimping economic growth.

Moreover, it can boost the state revenues of Russia, as a significant exporter of crude oil and gas, enabling its illegal invasion of Ukraine to continue for longer on the back of that funding, costing more lives and increasing the likelihood of escalation into a global nuclear war.

Also, it may increase the chances that U.S. President Joe Biden will do poorly in the November mid-term elections; making his government less likely to be able to deal effectively with the Russian- and Chinese-led security challenges that the world faces will face in the remainder of his presidency.

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However, under Saudi Arabia, OPEC cut its collective crude oil production by a huge two million barrels per day (bpd). This cut is the most significant crude oil production reduction since the 9.7 million bpd decrease in May 2020. Implemented to rescue oil prices from the once-in-a-lifetime threat posed to them at the height of the Covid-19 pandemic. This most recent two million bpd cut will last 14 months until December 2023.

Outlook around OPEC´s decision

The immediate impact of taking this decision was not so dramatic but might be very serious. But there are market factors that may put the industry in a problem.

The first is that the long-running program of releasing one million bpd of crude oil from the U.S.’s Strategic Petroleum Reserve will end this month. The second is that a European Union ban on seaborne imports of Russian crude is scheduled to go into effect on 5 December.

Saudi Arabia knew the tremendous upwards pressure that this historically enormous cut in crude oil supply would place on the global oil price. The country was also fully aware of the political ramifications of the cut for the U.S., Europe, and Russia.

U.S. economy and crude oil production relation

Also, as it is known, there is an obvious link between oil and gas prices, the U.S. economy, and the chances of re-election as U.S. president.

Historical precedent highlights that for every one cent that the U.S.’s average price of gasoline increases; more than US$1 billion per year in discretionary additional consumer spending is lost. Since World War I, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within two years of an upcoming election. However, presidents who went into a re-election campaign with the economy in recession won only once out of seven times.

The U.S. economy contracted an annualized 0.6 percent quarter-on-quarter in the second quarter of 2022. It confirms the economy technically entered a recession; following a 1.6 percent q-o-q contraction in the first quarter of the year. Finally, ahead of critical mid-term elections in November, President Biden faces not just a recession. He also faces the prospect of severe vote-losing falls in the U.S. stock and housing markets.

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