A coalition of oil-producing nations led by Saudi Arabia announced Wednesday it would slash oil production by 2 million barrels per day, in a rebuke to President Biden that could push up gas prices worldwide and worsen the risk of a global recession.
The OPEC Plus coalition said the cut in production would take effect in November. This would be the first time the group cut oil production targets since the beginning of the pandemic.
The coalition said it was making the move “in light of the uncertainty that surrounds the global economic and oil market outlooks, and the need to enhance the long-term guidance for the oil market, and in line with the successful approach of being proactive, and preemptive, which has been consistently adopted” by the group.
Wednesday’s move was more aggressive than most analysts had expected even a few days ago, and reflects the oil producing nations’ desire to react to the recent drop in global prices.
Higher energy prices could help Russia finance its war on Ukraine, a move the U.S. has sought to avoid. Higher energy prices could also weaken the resolve of other countries, which have supported Ukraine in trying to repel Russia after the February invasion.
Energy stocks climbed slightly on the news, contrasting to declines in the overall financial markets.
“The intention of the OPEC Plus cut was to break the fall in crude prices since the summer," said Bob McNally, an energy analyst at the Rapidan Energy Group. "If they succeed, then gasoline pump prices should also stop falling and range around current levels, until other market drivers impact the price.”
The cut comes despite aggressive lobbying by the Biden administration for the consortium to continue production at current levels or higher — punctuated by Biden’s visit to Saudi Arabia in July. Biden had earlier in his administration vowed to make Saudi Arabia an international pariah, but he re-engaged while trying to use all available channels to curb increases in the price of gas that had hurt his domestic approval ratings.
Biden’s efforts have been overshadowed by a recent steep drop in the price of oil that moved the consortium to act at an in-person meeting for the first time since 2020 in Vienna, on Wednesday. The price drop in oil prices was driven by a souring of the global economy, forcing demand to plunge. The production cut aims to lift prices back up.
The significant cut could also have considerable political fallout in the United States, where midterm elections will be held in just over a month. Falling gas prices this summer played a big role in lifting the political fortunes of Democrats, who face a tough election season. They also helped elevate Biden’s approval rating, and gave the party a glimmer of hope for blunting a widely anticipated Red Wave in November.
The OPEC coalition’s move could also add to inflationary pressures in the U.S. and Europe, as well as undercut the effort to bolster Ukraine as it defends itself against the Russian invasion. Russia relies on gas and oil sales for a large portion of its budget and had pushed for the production cut, which will enable Moscow to sell oil for higher prices on the global market, generating more revenue for its war and troop mobilization.
Oil prices jumped this week in anticipation of today’s news. They are expected to increase further now, likely to over $100 per barrel.
The impact the OPEC Plus decision could have on U.S. gas prices, though, is not entirely clear. The consortium was already failing to meet its previous production targets, with several of its members unable to fill their quotas.
The Biden administration waged a last minute push to convince Middle East allies not to dramatically cut oil production ahead of the meeting, according to senior administration officials. That effort, involving senior-level discussions with foreign-counterparts, was seen internally as a long shot.
One White House official quibbled with the suggestion that the Biden administration waged a major push to dissuade countries such as Saudi Arabia, Kuwait and the United Arab Emirates from cutting production, saying it was a “minor effort.” Other officials said it was a more significant push, but acknowledged that Biden was not making calls on the matter.
On Wednesday, the European Union advanced a U.S.-backed measure to impose a price cap on Russian oil, a move designed to force Russian President Vladimir Putin to accept lower energy revenue without pulling supply from global markets.
“A large supply cut would delight Moscow, which would benefit from both stabilized if not higher crude prices and an implicit sign of solidarity from its OPEC Plus colleagues as it braces for looming E.U. oil sanctions‚” McNally said before the cut was announced.
A customer refuels at a Chevron gas station in San Francisco, California, United States, on Oct. 3, 2022. (David Paul Morris/Bloomberg) Before the OPEC Plus meeting, prices were already up sharply in some areas of the U.S. where there are several hotly contested congressional races, as well as close races for governor. Those increases were propelled by maintenance with refineries on the West Coast and a large fire at a refinery in the Midwest.
Nevada, Washington, Oregon and Alaska have all seen prices jump by at least 40 cents per gallon in the past week. Throughout the swing states of the Midwest, the increase has been less severe, but large enough for drivers to feel the pain. In California, where there are at least eight close House races, prices jumped 62 cents over the last week to $6.38 per gallon of gasoline.
While the White House has little control over the cost of gas, which is guided by global markets, Biden has more actively engaged on the matter than many of his predecessors. That includes his order to release 1 million barrels of oil per day from the Strategic Petroleum Reserve, an action that helped lower prices but now makes the U.S. even more vulnerable to cost increases as it faces the challenge of replenishing.
The administration has already extended the release of that reserve oil into November. But the potential production cuts by OPEC Plus suggest the U.S. may not be able to restock at the lower prices administration officials had hoped.
“We will continue to take steps to protect American consumers,” White House press secretary Karine Jean-Pierre said on Tuesday, ahead of the announcement. “Our focus — and it’s been very clear for the past several months — has been on taking every step to ensure markets are sufficiently supplied to meet demand for a growing global economy.”
“Energy prices have declined sharply from their highs and American consumers are paying far less at the pump than they were several months ago,” she added.
However, Sen. Chris Murphy (D-Conn.) told CNBC in an interview on Tuesday the slash in production should lead to a “wholesale revaluation of the U.S. alliance with Saudi Arabia,” adding that Biden’s visit this year didn’t yield the necessary results from Riyadh. “When the chips are down the Saudis effectively choose the Russians instead of the United States,” he said. “We need them right now.”
Rep. Ro Khanna (D-Calif.) added in an interview: “President Biden should make it clear that we will stop supplying the Saudis with weapons and air parts if they fleece the American people and strengthen Putin by making drastic production cuts.”
The increasingly challenging realities of the global energy market are certain to raise tensions between the Biden administration and large oil producers. Biden and other Democrats have been repeatedly attacking oil companies for reaping record profits at a time when consumers are struggling to pay for a tank of gas.
Energy Secretary Jennifer Granholm has previously put oil companies on notice that the administration could use emergency powers to curb exports if the firms do not put more emphasis on boosting their domestic inventories. Oil executives and industry experts have warned such a curb on exports could backfire, tightening the global supply even further and discouraging investment in increased production.
As the OPEC Plus production cut loomed, the leaders of the American Petroleum Institute and American Fuel and Petrochemical Manufacturers sent Granholm a five-page letter on Tuesday warning that restrictions on exports “would likely decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.S. allies during a time of war.
Evan Halper, Adela Suliman and Amar Nadhir contributed to this report.