The Repercussions and Dimensions of Cutting Oil Production

The announcement by a number of key members of the Organization of the Petroleum Exporting Countries, OPEC+, of their intention to make a voluntary, additional cut to their production starting next May until the end of 2023 raises questions about the state of the energy market in the near future, especially since it is the second cut undertaken by these countries within six months (the first cut was approved in November 2022). Indeed, the new decision to cut output prompts questions about its repercussions for the future of a crisis-burdened global economy. The production cut decisions encompassed a group of countries that produce nearly 40% of global output, leading the price of Brent crude in the first days following the decision to rise at its highest rate in a year, jumping by $4.75, which amounted to more than 6% of the price prior to the announcement of the production cut decision. Oil prices had recently retreated to the level they were at in early 2022, after the Russian-Ukrainian war in late February of last year caused those prices to surge to record highs. Saudi Arabia, the United Arab Emirates, Kuwait, Oman and Algeria decided in a coordinated manner on a new cut to their daily production, in a precautionary move to achieve stability and balance in crude markets. Saudi Arabia will cut 500,000 barrels per day, Iraq 211,000 barrels, the United Arab Emirates 144,000 barrels, Kuwait 128,000 barrels, Algeria 48,000 barrels and Oman 48,000 barrels, according to what each country announced. For its part, Russia, a member of the OPEC+ alliance, announced that it would extend its crude oil production cut of 500,000 barrels per day until the end of 2023, bringing total crude oil production cuts to 3.66 million barrels per day (2 million + 1.66 million), or 3.7 percent of global demand. While economists consider that the OPEC+ group is trying through these measures to maintain a price of $80 a barrel over the medium term, other experts believe that OPEC+ in fact aspires for a barrel to reach the $100 threshold. The increase in oil prices expected after Sunday's announcement (the latest decision to cut output) is bound to increase inflationary pressures, which will raise and exacerbate the cost of living and heighten the risks of recession amid a worrying inflation crisis in the West, according to some analysts. Adding to the significance of the latest decision is the fact that it comes in the context of efforts by oil-exporting countries to adopt production policies that prevent the squandering of their oil reserves at low price levels, and guarantee adequate financing for their ambitious development projects and economic interests. The decision reflects the growing independence of these countries in general, and the Gulf states in particular, and their prioritization of national considerations over the interests of consuming nations, which have long controlled the decisions of the Organization of the Petroleum Exporting Countries through their allies among its member states. The importance of the latest production cut decision stands out further when placed in the context of the efforts exerted by China, Russia and the BRICS countries to substitute their national currencies in their mutual trade transactions, particularly in oil and gas markets. This is especially true given that China has worked over recent years to reach agreements with several countries on using its local currency instead of the dollar in commercial transactions, particularly oil dealings, in an attempt to curb the dominance of the US dollar over global trade. Russia's decision in March 2022 obliging gas importers to pay in rubles represented a practical translation of using the national currency instead of the US dollar in relations with "unfriendly" countries, helping to limit the impact of Western sanctions on the Russian economy, while Russia also concluded agreements with both China and Turkey for trade in local currencies. Chinese President Xi Jinping, during his visit to Saudi Arabia last December, had called on the Gulf states to price oil and gas in yuan on the Shanghai exchange, in order to make full use of the Shanghai Petroleum and Natural Gas Exchange as a platform for settling oil and gas trade in yuan, as he put it. The most significant development, however, was achieved in September 2022, when the Shanghai Cooperation Organization decided to use national currencies in mutual trade among the organization's member states. The new milestone in this context occurred this past March 28, when the Shanghai exchange completed the sale of an Emirati shipment of liquefied natural gas to the French company TotalEnergies in Chinese yuan, making it the first international transaction to establish the principle of multi-currency pricing. Thus, the United Arab Emirates took the first step in this field, even though Saudi Arabia had been first to express its openness to pricing part of its oil in Chinese yuan. The reasons that prompted the producing countries mentioned above to take the decision to cut output can be summed up in four factors: first, securing the stability of the oil market amid concerns over weak global demand and the end of the winter season on the one hand, and fears of a renewed liquidity crisis afflicting a number of US and European banks on the other. The second of these reasons is preventing speculation in oil markets, while maintaining a price level ranging between $80 and $100 a barrel constitutes the third reason, and the fourth and final reason is putting an end to pressure from the United States on producers to maintain current production levels. Important as these reasons are, and regardless of whether they were indeed the direct motive behind the decision to cut production or not, its repercussions warrant close attention with regard to rising oil prices, which coincide with the striking rise in the price of gold. Growing demand for the yellow metal, regarded as a store of value and a safe haven amid global financial instability, has pushed the price of an ounce of gold past US$2,000. Risks surrounding bank stocks due to the closure of Silicon Valley Bank and Credit Suisse also contributed to the rise in the price of gold, as did fears of a possible further decline in yields on the dollar and US bonds. Returning to the latest oil production cut decision and its implications, one can say that despite the economic and pragmatic justifications for the decision, it entails profound shifts in the priorities of the decision-making states, foremost among them the Arab Gulf countries, and in the production policies they pursue. The latest decision recalls the embargo on oil supplies to the West declared by Arab oil-producing countries ten days after the start of the October 1973 war, which led to what was known at the time as the oil shock, whose repercussions lasted until March 1974. Further underscoring the importance of recent developments, whether regarding cutting oil production, pricing shipments in currencies other than the US dollar, or the accompanying rise in the price of gold, is the tug-of-war implicit in the production cut decision between Arab oil-producing countries, particularly Saudi Arabia, and the United States over determining the production policies to be adopted and placing the economic interest of producing countries ahead of other considerations. Meanwhile, these developments coincide with intensifying Sino-US rivalry for global political and economic leadership on the one hand, and the US-Russian confrontation on Ukrainian soil in a military and economic war of attrition on the other. As the pace of economic conflict escalates between the United States and its rivals, from China, Russia and the BRICS countries all the way to the oil-producing nations, fears are growing that the economic conflict could turn into direct military confrontations among the countries concerned. For the underlying causes of wars, and the driving force behind them, have always been and remain the economy; those causes are now complete, or nearly so, so will war break out?

Translated from Arabic with AI. Read it in Arabic