Middle East

Why Saudi Arabia defied the US over OPEC oil supply cut

By Nadeen Ebrahim and Abbas Al Lawati, CNN

Abu Dhabi CNN  —  Saudi Arabia’s energy minister once famously said that the kingdom “derives pleasure from keeping everyone on their toes.”

That is likely how White House officials and Democratic politicians were left feeling when the kingdom led OPEC to announce a mammoth oil production cut this week, causing fears of even higher inflation just five weeks ahead of the midterm elections.

On Wednesday, OPEC+, the oil cartel led by Saudi Arabia and Russia, agreed to slash production by 2 million barrels per day, twice as much as analysts had predicted, in the biggest cut since the Covid-19 pandemic. An intense pressure campaign by the US to dissuade its Arab allies from the cut ahead of the decision seemingly fell on deaf ears. Russia is already pumping below its OPEC+ ceiling, and the bulk of the cuts will be made by Gulf producers.

Saudi officials insist that the kingdom must put its own economic interests ahead of domestic US political considerations.

“We are concerned first and foremost with the interests of the Kingdom of Saudi Arabia,” Energy Minister Prince Abdulaziz bin Salman al-Saud said in an interview with Saudi TV on Wednesday, adding that the government has “an interest in being part of the growth of the global economy.”

Prince Abdulaziz said the cartel needed to be proactive as central banks in the West moved to tackle inflation with higher interest rates, a move that could raise prospects of a global recession, which could in turn reduce demand for oil and drive its price down.

“This cut seems to be a proactive measure to hopefully avoid a price crash requiring a sudden cut as the US Federal Reserve continues to hike interest rates,” said Ellen Wald, a nonresident senior fellow at the Atlantic Council think tank in Washington DC.

Because of its heavy dependence on oil revenues, the Saudi economy has a history of falling victim to boom and bust cycles in the oil market, where high prices bring in a flow of cash followed by downturns. Experts say the kingdom is trying to protect itself from such an eventuality.

“Saudi Arabia is looking to head off a repeat of 2008 when the market crash sent the global economy into a recession and oil prices suddenly plummeted, requiring emergency action by OPEC,” said Wald.

Analysts also say Saudi Arabia cannot afford to let oil prices go below a certain level for budgetary reasons.

This year, the kingdom is expected to register its first budget surplus after eight years of deficits caused by low oil prices and the Covid-19 pandemic.

For its budget to break even, global oil prices must be at around $79 a barrel, according to the International Monetary Fund. Last month, prices dropped to $85 per barrel from a high of $139 just seven months ago. That was a warning sign for Saudi Arabia and other oil exporters, who depend on oil for a majority of their revenue.

“But the Saudis do not want to just balance the books, they want to ensure a steady stream of surpluses,” said Robert Mogielnicki, a senior scholar at the Arab Gulf States Institute in Washington, adding that the kingdom “would like to see prices moving closer to the high $90s.”

Saudi Arabia has the lowest oil extraction cost in the world, at around $3 per barrel. That means the vast majority of the revenue earned from each barrel goes into its coffers. And those funds are needed to finance everything from futuristic trillion-dollar cities in the desert to a sizeable government wage bill, despite the introduction of new taxes in recent years and attempts to diversify the economy.

“The high price [needed to balance the budget] is because of the large spending on government services, infrastructure investment, public sector, etc,” said Omar Al-Ubaydli, director of research at the Bahrain-based Derasat think tank, adding that “conventional tax instruments are largely absent, especially personal income tax.”

“It is trying to have a diverse and stable revenue source for the government because unstable government finances are highly disruptive to the economy,” added Al-Ubaydli.

Still, the response from the Democrats has been fierce, with politicians framing Saudi Arabia’s move as a hostile act against the US that benefits Russia by filling its coffers with petrodollars as it wages war on Ukraine.

“What Saudi Arabia did to help Putin continue to wage his despicable, vicious war against Ukraine will long be remembered by Americans,” tweeted Senate Majority Leader Chuck Schumer, a Democrat, on Friday.

The Biden administration was swift in its reaction. White House press secretary Karine Jean-Pierre put out a statement on Wednesday saying that it “is clear OPEC+ is aligning with Russia.” On Thursday, Secretary of State Antony Blinken said the US is “reviewing a number of responses” to Saudi Arabia’s move, adding that the White House is “consulting closely with Congress.” Some Saudis are describing the reaction as “hysterical.”

The Biden administration may now lend support to the bipartisan NOPEC bill that could expose members of OPEC+ to antitrust lawsuits by revoking immunity from the cartel’s national oil companies.

“The response coming from policy circles in Washington is exaggerated,” said Mohammed Alyahya, senior fellow at the Hudson Institute in Washington DC. “Saudi Arabia’s is primarily interested in ensuring that OPEC+ remains apolitical and focused on technical matters.”

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