This week’s surprise oil production cut by OPEC and its allies will push up gasoline prices at a time when the U.S. Federal Reserve is already struggling to bring down inflation without triggering a recession or further chaos in the financial markets. The move also underlines the growing political distance between the United States and the oil cartel’s top producer, Saudi Arabia. By putting the prospect of $100-a-barrel oil back in view after it had dropped to around $70, the production cut reinforces the view that Saudi Arabia—with help from Russia and its other OPEC partners—is striving to regain its position as the dominant force shaping oil prices.
On April 2, the coalition of oil producers known as OPEC+ announced it would cut oil production by 1.66 million barrels per day. That includes a previously announced cut by Russia of 500,000 barrels per day—some of which was likely to drop out of the market anyway because of Western sanctions. Given supply disruptions in Iraq and elsewhere, the actual cut to current global production will be a bit less than 1 million barrels per day.
As it did in October 2022, OPEC slashed output with the price for Brent crude oil at around $80 per barrel, a historically high level to try to orchestrate cuts of this magnitude. The announcement was designed to take oil traders and market analysts by surprise. Key OPEC officials, including the Saudi energy minister, had previously said OPEC planned to leave production unchanged for the rest of the year. In response to the unexpected cut, oil prices predictably surged, to around $85 per barrel as of this writing.
OPEC leaders cited an uncertain demand outlook as the rationale for their decision. A Saudi Energy Ministry official said the cut was “a precautionary measure aimed at supporting the stability of the oil market.” Officials in Riyadh, the Saudi capital, were also reportedly irritated that U.S. Energy Secretary Jennifer Granholm recently announced that it would be “difficult” for the United States to refill its Strategic Petroleum Reserve (SPR) this year—after the Biden administration had previously signaled it would do so when oil dropped below around $70 a barrel, as it did for a brief period after the failure of Silicon Valley Bank.
Still, OPEC’s decision is unlikely to be purely out of concern about market stability. Although oil prices have fallen from their recent highs in response to rising inventories, recession worries, and the banking sector crisis, most projections still see oil in short supply later this year and next, mainly due to China’s recovery and many years of underinvestment in new supply. The latest production cut means that a tighter market and higher oil prices will arrive sooner. If prices spike as many analysts now predict, it could more than compensate for lower sales, boosting OPEC revenues.
The significance of the cut goes well beyond higher prices at the gas pump. First, that Saudi Arabia felt the need to orchestrate such a large cut with oil prices at these levels demonstrates how large its revenue needs are. Riyadh needs to fund its ambitious domestic economic reform agenda—called Vision 2030—which plans to invest $3.2 trillion to diversify the Saudi economy by 2030. Saudi Arabia is clearly concerned about economic headwinds that could weaken global oil demand. It will point to its production cut last October—which did not keep oil prices from declining, despite fears in Washington—as evidence that it knows best how to manage oil markets and keep supply and demand in balance. Yet it is also true that Saudi spending on domestic construction and transport infrastructure last year was more than double the 2016-20 average and contract awards are expected to increase again this year. Saudi Arabia’s apparent preference for oil prices above $90 per barrel risks acting as a drag on the global economic recovery going forward.
Second, the oil cut, which will clearly upset officials in Washington, reinforces the growing recognition that Saudi Arabia is pursuing a nonaligned diplomatic strategy. The U.S.-Saudi relationship remains important to each side, for both security and economic reasons, as evidenced most recently by Saudi Arabia’s massive order of Boeing aircraft. At the same time, Saudi Arabia is hedging its bets by showing greater independence from the United States and deepening its economic and diplomatic ties with China, Russia, and its Persian Gulf neighbors. The Chinese-brokered détente between Iran and Saudi Arabia last month was the most recent example of this shift—and a reflection of growing unease among Gulf nations that they cannot rely on the United States to offer a protective umbrella and maintain regional stability. In an environment of escalating risks—between the West and Russia, the United States and China, or Iran and Israel—nations in the Gulf increasingly perceive the need to look out for themselves and ensure regional stability. Saudi Arabia, in particular, is keen to ensure regional stability while juggling ties with several key partners: the United States as a provider of arms, military training, and protection of waterways around the Arabian Peninsula; China as the largest oil buyer; and Russia as a key partner in OPEC+.
Third, the supply cut is more evidence that the historical oil-for-security bargain between Washington and Riyadh, cemented by then-U.S. President Franklin D. Roosevelt and Saudi King Ibn Saud on the USS Quincy in 1945, was an anachronism. The United States imports much less Saudi oil than it used to; and various actions by the United States, including its pursuit of nuclear deals with Iran and its failure to respond to Iran’s attack on Saudi Arabia’s key oil facility at Abqaiq, have, rightly or wrongly, undermined Saudi perceptions of Washington as a reliable security guarantor. After decades of positioning itself as a responsible manager of global oil markets concerned with such factors as the health of the global economy, Riyadh’s posture now is clearly one of “Saudi Arabia first.” This will include prioritizing domestic fiscal policy, as well as diplomatic outreach beyond the U.S. security umbrella.
Fourth, this cut strengthens Saudi Arabia’s geopolitical hand by increasing its available spare capacity, giving the country a unique ability to temper rising oil prices in the future by turning the spigots on. By cutting production now and drawing down the overhang in oil inventories that exists today, OPEC+ accelerates the timeframe in which the oil market enters a period of structural deficit when demand exceeds supply. As oil and gasoline prices likely rise later this year and in the run-up to the November 2024 U.S. presidential election—when high gasoline prices would be a key political issue—Saudi Arabia’s ability to curb prices by putting more supply on the market will enhance its leverage on Washington. Having already used up a significant part of the SPR, Washington has few remaining options to tame oil prices other than calling Riyadh.
Finally, the OPEC+ production cut bolsters Russia at a time when Western nations are trying to impose economic hardship on Moscow through sanctions that restrict its oil and gas revenues. In a tighter market, the discount at which Russia must sell its crude oil will likely shrink, giving a double boost to Russian oil revenues. The decision by OPEC+ to cut oil supply shows the partnership between Saudi Arabia and Russia over oil price strategy remains strong, even if it reflects a current alignment of interests rather than a durable strategic alliance. It is in the Saudi interest to see Russian production curbed and its production capacity weakened. In Riyadh’s eyes, Moscow is a weakening but useful addition to OPEC that helps ensure future Saudi supply dominance. The consensus among OPEC countries to cut production also belies any belief that OPEC is unraveling and that key members, such as the United Arab Emirates, are about to withdraw from the cartel.
Long term, the production cut is another step in Saudi Arabia’s efforts to strengthen its geopolitical position in the decades ahead by increasing its influence on global oil markets—notwithstanding the prevailing narrative that the energy transition would mean the collapse of petrostates. As one of this article’s writers (Jason Bordoff) and Meghan O’Sullivan have argued, OPEC’s share of production will rise in the decades-long process of energy transition, and the failure by Western policy-makers to synchronize declines in oil supply with declines in demand means even more volatility ahead in a turbulent transition. Today, the global oil sector is underinvesting in supply relative to the current trajectory of demand. Saudi Arabia, as well as the UAE, are investing tens of billions of dollars to increase production capacity. Meanwhile, years of poor economic performance combined with the shock of the oil price collapse during the pandemic mean that U.S. shale oil production will grow far less quickly in the years ahead. Writing in Foreign Policy, Bordoff predicted in 2020 that Saudi Arabia’s spare capacity, combined with a diminished outlook for U.S. shale, would strengthen Riyadh’s hand going forward as market power was surrendered to OPEC and its allies over the course of a bumpy energy transition.
The recent detente between Iran and Saudi Arabia at the hands of Chinese diplomacy is evidence that regional risks—combined with concerns about great power rivalry and the United States’ perceived retreat from the Middle East—have heightened worries in the Gulf about potential conflict and instability. Following the surprise OPEC+ production cut, oil demand growth is now poised to outstrip supply even sooner this year, leaving Saudi spare capacity as one of the few remaining relief valves for high prices at the pump. Given these economic and regional risks, the energy sector should prepare for more volatility ahead. Eventually, oil demand will begin to decline, the United States will restock its SPR, and non-OPEC sources of oil will grow. But until that time, this week’s surprise cut is a reminder that reports of OPEC’s demise, particularly Saudi Arabia’s as the key swing producer with extra supply, remain premature.