The Organization of the Petroleum Exporting Countries (OPEC) and a group of other producers led by Russia (OPEC+) have agreed to cut oil production beginning next month by 1.16 million barrels per day. The announcement raised oil prices, both WTI and Brent, to over $80 per barrel—an increase of 6.3 percent or about $5 per barrel. Following the announcement, Goldman Sachs raised its forecast for Brent to $95 a barrel by the end of the year and to $100 per barrel in 2024. Now that President Biden has depleted the Strategic Petroleum Reserve by 260 million barrels and did not refill it as promised at $70 a barrel, he has few options to keep gasoline prices contained—prices that have been raised due to his own policies.
The output cut adds to a reduction of 2 million barrels a day agreed to in October by the same group. Together, the output cuts amount to about 3 percent of the world’s petroleum production taken off the market in seven months. The production cut could lead to a longer-term increase in prices as the oil market is seen to be tightly balanced between supply and demand.
Saudi Arabia is shouldering most of the oil production cuts, cutting production by a further 500,000 barrels a day starting in May through the end of the year. In February, Russia declared it would cut production by 500,000 barrels a day, in response to Western sanctions. Only a handful of the other OPEC+ countries are promising to lower production. OPEC members Iraq, the United Arab Emirates, Kuwait and Algeria and non-OPEC members, Oman and Kazakhstan, agreed to reduce output. It appears that the agreement was negotiated primarily between Saudi Arabia and Russia to fund Saudi Arabia’s domestic projects and replenish Russia’s reserves. The move showed that Saudi Arabia is determined to be proactive to keep prices high, perhaps in the range of $90 a barrel, according to some analysts. OPEC Plus, made up of OPEC, Russia and some others, produces roughly half of the world’s oil.
OPEC+’s decision to curb its output deeper comes on top of the shutdown of 470,000 barrels a day of exports from Iraq. Iraq recently indicated that it had won a long-running arbitration case against Turkey over control of oil exports from Iraqi Kurdistan to Turkey that had halted supplies from the region. Supposedly, a preliminary agreement to resume exports through Turkey was reached but the deal still needs to be approved by the Iraqi parliament. But, oil executives from companies operating in the region believe any restart of shipments may be short-lived. When oil supplies tighten in one part of the world, the effect is felt throughout the world, as oil is traded and supplies flow towards demand.
Biden’s Saudi Relationship
Last year, President Biden made a special appeal to Saudi Crown Prince Mohammed bin Salman in Saudi Arabia to increase oil production, only to have OPEC cut its output at its next meeting. Some say Saudis now view Washington as “just one of several partners” rather than their most important ally, as in the past. Further, Saudi Arabia is making deals with China. Saudi Aramco raised its multi-billion dollar investment in China by finalizing and upgrading a planned joint venture in northeast China and acquiring an expanded stake in a privately controlled petrochemical group. The two deals have Aramco supplying the two Chinese companies with a combined 690,000 barrels a day of oil, raising its rank as China’s top provider of oil. Russia now holds that rank as it has been supplying oil to China at below-market prices due to sanctions from the West for its invasion of Ukraine. China is fostering relations with oil suppliers around the globe to meet their increasing demand, which also benefits their foreign policy aims.
Aramco agreed to acquire a 10 percent share in privately controlled Rongsheng Petrochemical Co—the biggest of the Chinese ‘teapot’ oil refiners–for $3.6 billion, which includes the supply of 480,000 barrels per day of oil to Rongsheng-controlled Zhejiang Petrochemical Corp (ZPC) for 20 years. It follows a preliminary agreement Aramco reached with the Zhejiang provincial government in 2018 for a 9 percent stake in ZPC. Aramco is already selling oil to the east China plant which operates an 800,000-barrel-per-day refinery–the single largest in China–under sales agreements renewed annually.
Aramco’s agreement with Chinese partners for an oil refinery and petrochemical project in the northeast Chinese province of Liaoning is expected to start in 2026 to meet the country’s growing demand for fuel and chemicals. The Liaoning project, in the city of Panjin, will be Aramco’s second major refining-petrochemical investment in China and follows the world’s top oil exporter reporting a record profit of $161 billion in 2022. Joint venture Huajin Aramco Petrochemical Company will build and operate the Panjin complex which will contain a 300,000 barrels per day oil refinery and a cracker with an annual production capacity of 1.65 million metric tons of ethylene and 2 million metric tons of paraxylene. The Liaoning province project is expected to cost 83.7 billion yuan ($12.2 billion).
Biden Could be Producing More Oil Domestically
Since his first day in office, President Biden has signed executive orders to limit oil production in the United States as he works toward a net zero carbon future. Despite indicating that oil will be around for another 10 years in his state of the union address, he has revoked the Presidential permit for the Keystone pipeline, placed a moratorium on leasing, included a no-lease option in his administration’s 5 year offshore lease plan that has been delayed by 18 months, approved fewer drilling permits, and removed federally owned lands from development. His latest move was to allow only 3 drilling pads—the fewest to make the project economic—at the Willow project in the National Petroleum Reserve Alaska. That project, once developed, is expected to produce 180,000 barrels of oil per day—just 15 percent of the OPEC+ latest production cut. However, at the same time Biden withdrew 16 million acres in Alaska from oil development—an area the size of West Virginia. His response to the bipartisan energy permit-streamlining bill passed by the House of Representatives (H.R. 1) was to issue a veto message.
Conclusion
Next month, OPEC+ will be cutting oil production by 1.16 million barrels per day, thereby raising oil prices. It described the latest “voluntary production adjustments” as a “precautionary measure aimed at supporting the stability of the oil market,” i.e. getting the prices it wants, mainly to support domestic projects in Saudi Arabia and Russia’s war in Ukraine. Americans can expect higher gasoline prices as a result. This time, however, the Biden administration will have a much smaller Strategic Petroleum Reserve to draw from to ease U.S. gasoline prices as it failed to refill the 260 million barrels that Biden took from it to contain gasoline price increases last year—an election year. Biden could easily obtain more oil domestically by removing his anti-oil policies, but that would conflict with his net zero carbon future. Instead, Americans can contend with continued energy-induced inflation, energy supply shortages and a stagnating economy.
