By Ashwaty Nambiar
The Organisation of the Petroleum Exporting Countries, or the OPEC+, is made up of 13 members along with 10 of the world’s major non-OPEC oil exporting nations. The organisation of these countries determines the quantity of oil supplied in the oil market and therefore sets oil prices within that market.
OPEC+, comprised of 23 oil producers in total, has decided to impose a significant oil production cut as of October 2022. Where Saudi Arabia (KSA) controls approximately a third of OPEC+’s oil-reserves, this decision has raised a few eyebrows, especially regarding the reasoning behind it. Indeed, such an action begs the question – is this an entirely self-interested act?
In regard to the economic climate, there are certain factors that point to this being a decision made to benefit Saudi in such a context. Firstly, the cut has driven up the price of oil substantially as would be expected by the simple price-supply model; a fall in supply means that it is more difficult to meet the relatively inelastic demand for oil, and thus, to artificially restrict such demand, prices are hiked up to reduce any existing or potential deficits.
For a country such as the USA, it has been seen that such a production cut has “helped drive up the price of American benchmark oil by almost $10 per barrel”, leaving consumers in such countries at a loss by forcing them to reduce their oil consumption. Looking at KSA’s economy, it is predicted that there will be a global recession within the next year which will negatively impact the price of oil, and potentially lead to a total oil price crash. Thus, it would make sense that such a production cut was made to favour the health of the country’s economy. This is furthered by KSA’s position in OPEC+, overall, providing a basis as to why Saudi may have wanted to drive up these oil prices.
Another factor that contributes to the production cuts being seen as one of self-interest is the Saudi Arabia’s relationship with Russia and how, despite the Russia-Ukraine conflict, the relationship between the two countries remains strong. In the context of the Russia-Ukraine conflict, it is seen that numerous other countries have imposed sanctions, quotas, and other restrictions on Russian goods following their invasion of Ukraine. Consequently, Russia has been experiencing a fall in their net exports as foreign demand has fallen and the aggregated willingness of other countries to supply Russia with their goods has also fallen, therefore lowering imports. As gross domestic product (GDP) and output is comprised of the sum of consumption, investment, government spending and net exports, a fall in net exports results in a fall in total output, and thus, presents the issue of how this falling output/GDP may lead to a fall in economic growth, should this persist in the long run.
As the conflict continues, it can be expected that the aforementioned restrictions will tighten, therefore resulting in further revenue losses for Russia. When considering this regarding Saudi’s self-interest, it can be said that this is an act of support towards Russia to maintain this relationship despite most other countries siding with Ukraine. This is a feasible concept considering Russia’s large holding at OPEC+. This is furthered through the consideration of Saudi and Russia being the largest oil producers after the US. By Saudi imposing such an act of support towards Russia, it can be said that this reflects a form of self-interest as with both being largely involved in OPEC+, it would be in Saudi’s best interests to maintain and strengthen their relationship with Russia. This will also allow Russia to reciprocate should Saudi require this in some form.
Looking further into the global economic climate, with energy costs rising exponentially, a spike in oil prices will only add to this, affecting a large proportion of countries, as again, Saudi is one of the largest suppliers of oil. This move may also be based on Saudi’s need to maintain some production (spare) capacity to deal with the current volatility of the oil market. However, as discussed, this will make oil less accessible to consumers given the increase in price, especially considering the widespread increases in the cost of living.
Following the consideration of these factors, it’s worth considering: is this truly an act of self-interest? KSA has a well-established place in the oil-market, where the market is already on the brink of returning to a state of instability, is it feasible to believe that Saudi would choose to hike up oil-prices without good reason?
There’s a difference between a selfish and self-interested act despite the portrayals of this decision by other parties, and this difference should be taken into consideration. Forecasting agencies have predicted a decline in global oil demand from October to December and thus, it would make sense for OPEC+ (and therefore Saudi) to cut back on oil production.
Moreover, Saudi is looking at indicators pointing towards an oil price crash within the next year and consequently, as price volatility and sudden cuts hurt oil producers, it is not strange that Saudi Arabia may have chosen to cut oil production as a preventative measure, rather than to have to counteract later.
Nevertheless, the effects of such a cut are significant, and in looking through such an analysis, it is clear why it might be seen as a self-interested action. The immense discussion surrounding the production cuts may be due to the significance of Saudi Arabia in the oil market and global economy, as well as the fact that they are amongst the leading OPEC countries.
To evaluate, it can be said that there is motivation behind the claims of these oil production cuts with regard to Saudi Arabia’s self-interest. In consideration of all factors, such as the urgency at which this decision was made and pushed, Saudi’s position in OPEC, and the need to maintain good relations with Russia, it can be argued that there is at least some self-interest behind the decision to cut oil production.
Image Source: VLADIMIR SIMICEK/AFP VIA GETTY IMAGES