The move by the Organization of Petroleum Exporting Countries and its partners drew a violent reaction from White House officials and almost immediately resonated through national and global financial markets, threatening higher energy costs for the United States and European countries already facing inflation and economic instability have to fight .
The cut in production is also increasing geopolitical tensions at a precarious moment for the world’s major powers. Biden administration officials had made extraordinary efforts to urge Saudi Arabia to produce more oil to meet global shortages caused by Russia’s invasion of Ukraine, with the president personally visiting Saudi leaders on a trip to Jeddah. With this step Saudi Arabia has at least partially denied those requests, leading senior White House officials to consider their next steps and publicly touting unprecedented measures to undermine the Gulf nation’s grip on international energy markets.
Russia will benefit from the cut because lower production will raise the price of oil — helping Moscow fund its war effort in Ukraine. And it could test Europe’s resolve to support Ukraine even further before economists forecast a sharp slowdown in economic growth across the continent. American consumers could also be weighed down by higher gas prices, potentially threatening the Biden administration’s resolve to cut gas costs ahead of the 2022 midterm elections.
This would be the first time the group has lowered oil production targets since the pandemic began. And it’s more aggressive than many analysts were expecting just days ago. The OPEC Plus coalition, led by crude oil giant Saudi Arabia, said the production cut 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 OPEC Plus’ short-sighted decision to cut production quotas as the global economy grapples with the ongoing negative impact of Putin’s invasion of Ukraine,” said U.S. National Security Advisor Jake Sullivan and the director of the National Economic Council, Brian Deese statement.
The statement added that the administration will consult with Congress about additional mechanisms “to reduce OPEC’s control over energy prices” – suggesting that US policymakers may be interested in extending a long-standing exception to federal antitrust rules repealed, which will allow the consortium to coordinate prices effectively. If carried out, the move would in turn draw fierce opposition from Saudi Arabia and its allies, analysts say.
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“This clearly points to the potential for higher oil prices, fueling recessionary forces in the global economy and increasing risks for global financial instability,” said Mark Sobel, a former senior Treasury Department official.
Energy stocks edged higher on the news, in contrast to declines in the broader financial markets. The immediate impact on gas prices remained unclear. Claudio Galimberti, head of Americas analysis at Rystad Energy, said gas prices in the United States are likely to rise by about 10 percent across much of the country, although the actual increase will depend on many factors.
“The intent of the OPEC Plus cut was to halt the decline in crude oil prices since the summer,” said Bob McNally, energy analyst at Rapidan Energy Group. “If they are successful, dispenser prices should also stop falling and hover around current levels until other market drivers influence the price.”
The cuts come despite aggressive lobbying by the Biden administration to have the consortium continue production at current levels or higher – punctuated by Biden’s visit to Saudi Arabia in July. Biden had previously vowed in his administration to make Saudi Arabia an international pariah, but he rallied again while trying to use every available channel to stem the rise in gas prices that had hurt his domestic approval ratings. The government had tried to isolate Saudi Arabia in part because of its human rights record.
The production cuts could have major political ramifications in the United States, where midterm elections are in just over a month. Falling gasoline prices this summer played a big part in improving the political fortunes of Democrats as they face a difficult election season. They also helped boost Biden’s approval rating and gave the party a glimmer of hope to tone down a much-anticipated red wave in November.
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The move by the OPEC coalition could also increase inflationary pressures in the United States and Europe and undermine efforts to strengthen Ukraine while it defends itself against Russian invasion. Russia relies on gas and oil sales for a large part of its budget and had been pushing for the production cut that will allow Moscow to sell oil at higher prices on the world market and generate more revenue for its war and troop mobilization.
Oil prices have rocketed this week in anticipation of today’s news. Expected to continue higher now, likely to over $100 a barrel.
According to senior government officials, the Biden administration made a last-minute push to convince Middle East allies not to dramatically cut oil production ahead of the meeting. This effort, which involved high-level discussions with foreign colleagues, was viewed internally as far-fetched.
A White House official joked by suggesting that the Biden administration has made a major push to dissuade countries like Saudi Arabia, Kuwait and the United Arab Emirates from cutting output, saying it’s a “small one.” Effort”. Other officials said it was a more significant push but acknowledged Biden made no calls on the matter.
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“A big supply cut would please Moscow, which would benefit from both stabilized, if not higher, crude oil prices and an implicit show of solidarity from its OPEC-plus peers as it prepares for looming EU oil sanctions,” McNally said before the cut was announced.
The OPEC-Plus coalition said it was taking the step “given the uncertainty surrounding the global economic and oil market outlook and the need to improve long-term oil market guidance, and consistent with the successful approach of being proactive and proactive.” preventive, which was consistently adopted by the group”.
Ahead of the OPEC Plus meeting, gas prices had already risen sharply in some areas of the United States that are home to several hotly contested congressional races as well as close races for governor. These increases were driven by maintenance work at West Coast refineries and a major fire at a Midwest refinery.
In Nevada, Washington, Oregon and Alaska, prices have all risen by at least 40 cents a gallon over the past week. In all of the swing Midwest states, the surge was less severe, but enough for riders to feel the pain. In California, which has at least eight close convention races, gasoline prices rose 62 cents to $6.38 a gallon last week.
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While the White House has little control over gas prices, which align with global markets, Biden has been more actively engaged on the issue than many of his predecessors. These include his order to release 1 million barrels a day of oil from the Strategic Petroleum Reserve, a measure that helped lower prices but now makes the United States even more vulnerable to cost increases as it faces the challenge of replenishment.
The government has already extended the release of this reserve oil until November. But the potential output cuts from OPEC Plus suggest the United States may not be able to replenish inventories at the lower prices that officials were hoping for.
“We will continue to take steps to protect American consumers,” White House press secretary Karine Jean-Pierre said Tuesday before the announcement. “Our focus – and this has been very clear over the last few months – has been to take every step to ensure markets are adequately supplied to meet the demands of a growing global economy.”
She added, “Energy prices have fallen sharply from their peaks, and American consumers are paying far less at the pump than they were a few months ago.”
However, Sen. Chris Murphy (D-Conn.) told CNBC in an interview that the production cut should lead to a “major reassessment of the US alliance with Saudi Arabia,” adding that Biden’s visit this year did not provide the needed Riyadh has produced results. “When it comes down to it, the Saudis are effectively choosing the Russians over the United States,” he said. “We need them now.”
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The increasingly challenging realities of the global energy market are sure to heighten tensions between the Biden administration and major oil producers. Biden and other Democrats have repeatedly attacked oil companies for making record profits at a time when consumers are struggling to pay for a tank of gas.
Energy Secretary Jennifer Granholm has previously warned oil companies that the government could use emergency powers to rein in exports if companies stop placing emphasis on increasing domestic inventories. Oil executives and industry experts have warned that such an export ban could backfire, further tightening global supply and discouraging investment in increased production.
As the OPEC Plus production cut loomed, heads of the American Petroleum Institute and American Fuel and Petrochemical Manufacturers on Tuesday sent Granholm a five-page letter warning that export restrictions are “likely to reduce inventories, reduce domestic refining capacity and create upward pressures.” impact on consumer fuel prices and alienate US allies in wartime.”
Evan Halper, Adela Suliman, and Amar Nadhir contributed to this report.