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A Saudi Aramco sign is pictured at an oil facility in Abqaiq, Saudi Arabia.
The Saudis’ big oil cut begins. How long will it last?
The Saudis’ controversial plan to slash oil production by 1 million barrels per day officially kicked off on July 1. The kingdom hopes that these voluntary cuts will help raise oil prices, which have remained sluggish for the better part of 2023. (The OPEC+ cartel – which include resource-rich countries in the Middle East, Latin America, and Africa, plus Russia – surprised observers when they announced some output cuts back in the spring that briefly drove up prices.)
Riyadh, for its part, has so far said that this reduction will last for the month of July but emphasized that it remains open to an extension. This comes as the global benchmark for crude oil has dropped around 13% in value so far this year, down from sky-high prices seen last year when Russia’s war in Ukraine sent commodity prices soaring.
While the Saudis hope that increasing demand from big buyers like India and China will help keep oil prices steady in the next few months – which Riyadh is banking on to help it reach its ambitious economic goals – many economists say that a number of factors, including ongoing interest rate hikes and China’s slower-than-expected economic bounceback, will continue to sap demand throughout 2023. Indeed, recession fears in wealthy countries don’t help either.
But could this plan backfire? If oil prices do increase too much, Riyadh risks irking Beijing, its number one buyer of crude oil. What’s more, higher oil prices could further aggravate global inflation, causing the US Fed and European Central Bank to again raise interest rates that might in turn … slow economic growth and reduce demand for oil.
The next quarter will be crucial, and the Saudis must carefully play their hand.
Saudi Arabia's Minister of Energy Prince Abdulaziz bin Salman Al-Saud arrives for an OPEC meeting in Vienna.
Global oil prices and a “Saudi lollipop”
In a dramatic decision, Saudi Arabia announced Sunday that it will take a unilateral step to slash its oil output by 1 million barrels per day in order to boost global oil prices.
Other OPEC+ states – which include resource-rich countries in the Middle East, Latin America, and Africa, plus Russia – committed to extending earlier cuts announced in April through the end of 2024, though they didn’t go even deeper like the Saudis.
Oil prices have hovered between $70-76 in recent months, well below the $80.90 per barrel the International Monetary Fund estimates that Riyadh needs to meet its ambitious economic goals and diversify its economy away from dirty fossil fuels. Still, oil prices have remained sluggish despite efforts by the Saudis in particular to tighten supplies over the past year.
Saudi Energy Minister Prince Abdulaziz bin Salman, who reportedly made the call, said the cut would be for the month of July but could be extended, describing the measure as a “Saudi lollipop” for the oil-producing cartel. (The subtext: What’s good for us is good for you!)
The US and EU, for their part, have accused the Saudis of manipulating oil prices and causing global economic havoc since Russia’s invasion of Ukraine in Feb. 2022. Surely, this will only further infuriate the Biden administration, which wants to keep gas prices down from record highs seen last year as the 2024 presidential race gets underway.
The Saudis are sending a clear message that they are willing to set a floor price for their most valuable export. And while they won’t care much about angering the Americans, they will care about the Chinese response, considering that Beijing is the kingdom’s largest market.
Will Biden say sorry to MBS?
Bizarre marriages of convenience dominate the geopolitical landscape: Russia and China; Iran and Venezuela; Israel and Turkey. The list goes on.
When President Biden came into office, he said he wouldn’t give a “blank check” to the world’s autocrats, including those associated with longtime US allies.
As part of his human-rights focused foreign policy, Biden rejected any dialogue with Saudi Crown Prince Mohammed bin Salman (MBS), the 36-year-old de facto Saudi leader who’s credited with big reforms like allowing Saudi women to drive. He’s also overseen acts of incredible brutality, including the murder of dissident-journalist Jamal Khashoggi and the scorched-earth military campaign in Yemen.
But two years in and ample crises later, Biden is ready to sit down for a face-to-face with MBS next month in Riyadh. Why the massive about-face?
Liquid gold. The US-Saudi relationship has always been driven by shared interests rather than values. The Saudis, for their part, sit on the world’s second-largest oil reserves and are the world’s second-largest producers of crude. Indeed, in an age where dirty energy still dominates, this gives the Saudis an enormous amount of control over global supply chains, inflation, and economic growth.
“Unlike Lehman Brothers, the US-Saudi relationship was too big to fail,” says Aaron David Miller, a senior fellow and Middle East policy expert at the Carnegie Endowment for International Peace.
As the US became the world’s largest oil producer in recent years – surpassing Russia and Saudi Arabia – a growing perception took hold in many corners of Washington that America would be insulated from global energy shocks, and that global reliance on Middle Eastern oil would significantly wane.
Clearly, Russia’s invasion of Ukraine has thrown that theory on its head. Western sanctions on Russian energy exports have sent oil and gas prices into a tizzy, with US gas prices having recently soared to more than $5 a gallon, a 63% rise from the same time last year. President Biden – who is getting pummeled in the polls ahead of November’s midterm elections – is now pleading with the Saudis to scale up oil production to offset losses from Russia and keep gas prices down.
While Riyadh, the de facto leader of the OPEC producers’ group, has responded to market shocks in the past by increasing oil supply, the Ukraine crisis has made it clear that the Saudis, who have also cultivated ties with Russia, aren't willing to ditch existing oil production quotas. Indeed, they are also sending an implicit message to the Biden administration that it needs to treat its partners better.
What do the Saudis want?
MBS might not be a super sensitive guy, but even alleged murderers have feelings. Simply put: the crown prince “wants an apology,” says Miller, adding that MBS “believes he was wronged” and that the Biden administration “insulted his honor.”
But apart from atonement, there are other tangible things that Riyadh wants from Uncle Sam, including increased security guarantees, particularly as Iran, Riyadh’s arch nemesis, is going rogue on uranium enrichment. (Even though US-Saudi relations were strong during the Trump years, the Saudis were furious that the US barely responded to a 2019 Iranian attack on major Saudi oil facilities.)
While the US certainly is not prepared to be dragged into a war with Iran, Biden is likely willing to “talk [with MBS] about integrated air defense systems not only with Saudi Arabia but also with other Gulf countries,” Miller says.
The indignity of global politics: What will Biden get?
Israel and Saudi Arabia have long been cooperating – surreptitiously – on a host of strategic interests, and there are reports that Riyadh might be willing to formalize that relationship by signing onto the Abraham Accords, which normalized relations between Israel and a host of Arab countries. If nothing else, Biden could cast such a development as a win back home.
What’s more, Biden could use the Saudi meeting to “encourage more movement to solidify the ceasefire in Yemen and lift the Saudi blockade,” that’s preventing humanitarian aid shipments, says Bruce Riedel, a senior fellow and director of the Brookings Intelligence Project. “That will save lives, especially children,” he says. Many Republicans and Democrats would likely get behind such a push.
However, it’s unlikely that Biden will make much progress on the oil front: “The Saudis will do very little to lower oil prices because they are making a fortune,” from the current global energy implosion, Riedel says, adding that they also won’t want to undercut budding relations with Moscow.
Still, Biden will try his best to sweet-talk MBS, a man he once vowed to treat as a “pariah.” But come July, “Biden will be pilloried in the US and accused of hypocrisy,” Riedel says, adding that “if oil prices don’t dramatically fall, which they won’t, he will be seen as a weak failure.”