Are Russia and Saudi Arabia Sticking it to Biden Weeks Before the US Midterm Elections?
N. Anthony Alexiou
Yes. Yes, they are. Sure, OPEC+ members are looking for more revenues but given the fragility of the world economy, this isn’t the way to do it. The official reason is that oil producing countries are seeing a worldwide economic slowdown on the horizon and want to make sure they’ll have enough money to make it through. Prices dramatically rose this past spring and summer with the advent of the conflict in eastern Europe. US President Biden did get some price concessions during his last visit to the Middle East which brought down prices significantly but, when it comes down to it, Russia has a ‘special operation’ they need to pay for, and other OPEC countries have expenses and $90/bbl is not going to cut it. The irony of the decision is that an increase in worldwide oil prices may very well be one of the major catalysts that causes that economic slowdown to actually happen – which is why the recession excuse is just that, an excuse.
Russia is obviously trying to find any way possible around western-led sanctions and knows that not every part of the world is willing to pay more because of them - this is a bit of a solution. Higher prices are
forcing a lot of countries that would otherwise have bought western oil to look for bargains, namely Russian oil. The leadership of both Philippines and Indonesia are pushing for domestic purchasers to buy from the ‘most competitive energy sources’ and that right now will typically be Gazprom. Philippine Energy Secretary Rafael Lotilla stated “As we learned from Ukraine, there’s always the threat of war breaking out somewhere in some part of the world and this has to be taken into account as well by our downstream oil industry.” Indonesia is facing a separate problem where high oil prices are costing the government billions in fuel subsidies. The government last month was forced to reduce the subsidy to ease pressure to the national budget, a move that prompted protests. Indonesian Energy Minister Arifin Tasrif stated that he was willing to buy oil from anywhere in order the keep the price of domestic fuel under control. Anywhere.
The US of course is not happy. This action flies in the face of western sanctions against Russia, both making Russian oil a bargain in Africa and Asia but also giving Moscow desperately needed revenues. The rise in worldwide oil prices will also affect the US and should be hitting about 2 weeks or so before the midterm elections – just enough time to anger voters and give the Republicans the edge they need. While it won’t put Biden out of power, a Republican-led congress will hamstrung Biden’s agenda for the second half of his term. Beyond Washington, the US is not the only one unhappy about this. China has criticized the move saying that oil is far too important a world commodity to be subjected to price controls seemingly on a whim. China has been one of the largest buyers of Russian oil this year and while they are not openly supporting what’s going on between Russia and Ukraine, some of their actions are flying the in the face of western sanctions.
Ultimately, this is a political rather than an economic move. OPEC+ knows that the already weakening economy will make the proposed production cut almost impossible to achieve. If demand is slacking, it will be even less at higher prices, meaning that the increase in price a 2 million barrels a day will actually bring in about the same revenue, if not less. Less of a production cut would make more sense for OPEC+ IF their goal is hedging against recession-induced demand decreases but that doesn’t seem to be their main reason. Russia and Saudi Arabia know what they’re doing and while some of the decision might have been economic, the timing shows it’s meant to hurt Biden – something that Moscow is more than happy to do. We’ll see how far the production cuts will go and how long they will stay but the feeling is that by early 2023, production will have increased again back to almost current levels.
N. Anthony Alexiou is the Founder and Principal of The Minotaur Group