Riyadh sends a signal

Will OPEC’s production cuts save the Russian economy?

On October 5, the 24 countries that make up OPEC+ reached a deal to cut oil production by two million barrels a day in a bid to bring prices back up amid a weak global economy. The news caused the price of Brent crude oil to increase to more than $93 a barrel. To find out whether this portends the failure of the West's anti-war sanctions, Meduza spoke to Institute for Energy and Finance president Marcel Salikhov.

OPEC has not been pleased with the U.S. government’s response to Russia’s war against Ukraine. “The political context doesn’t really matter to them,” analyst Marcel Salikhov told Meduza; what they do care about is the Biden administration’s decision to sell an extra million barrels a day in order to reduce domestic gas prices.

“In the last few months, when [oil] prices fell from $120 a barrel to $80, many OPEC countries asked the U.S. to stop sales in order to raise prices,” said Salikhov. The U.S. refused — something many OPEC members saw as an “unfriendly step.”

Meanwhile, the G7 is set to impose a price cap on Russian oil beginning in December, while the EU announced plans for a similar policy this week. In OPEC’s view, this sets a dangerous precedent. “Today [it hits] Russia, but five years from now, it could be, say, Saudi Arabia — as a response to some undemocratic behavior,” Salikhov said.

It’s in that context that OPEC+ — which consists of the 13-member OPEC cartel along with 11 non-member allies — announced Wednesday that will cut its own oil production by two million barrels a day. But as Salikhov told Meduza, because of the nature of OPEC’s quota system, it’s unclear whether the announcement will have much of a material impact.

“The actual output of OPEC+ countries right now is 3.6 million barrels per day less than what they could be putting out without exceeding their quotas,” he said. “Many member countries produce less oil than their quota allows.”

The key question, according to Salikhov, is whether Saudi Arabia in particular will actually reduce its output; if it doesn’t, the newly announced quota reduction might serve as little more than a signal to the U.S.

Salikhov said Moscow was likely one of the parties lobbying for a cut in OPEC+ oil production. While not a full OPEC member, Russia’s role in the organization has grown in recent years due to its ability to increase or decrease its output in response to international events — something not every oil exporter can do, according to the analyst.

“Right now, [however,] Russia isn’t able to influence anything within OPEC+ because it’s producing far below its quota. Russia’s problem is finding customers for its oil amid sanctions. Nonetheless, Russian Energy Minister Alexander Novak personally attended the meeting in Vienna, and that, despite the sanctions that had just been imposed, was also an important signal,” Salikhov told Meduza.

While it’s possible Russia will end up selling its oil for a lower price once price caps come into effect, as the measure’s authors hope, Salikhov said that’s far from Russia’s only option.

“There are different steps Russia could take. Instead of decreasing production, they could redirect [their oil] to different countries, or, for example, limit their export. Hypothetically, Russia could apply pressure through Kazakhstan: Kazakhstan isn’t able to export oil except through Russia, so [Russia] could restrict its supplies,” he speculated.

But one thing’s for sure, Salikhov said: Russia’s gas prices won’t go up.

“The Russian market is structured in such a way that the price of gasoline doesn’t increase and doesn’t decrease,” he said. “Essentially, the point is to keep the domestic price of oil products from changing, regardless of what happens in global markets. [...] In America, for example, the price of gas goes up and down. But in Russia, everything has to be stable.”

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Interview by Margarita Lyutova

English-language summary by Sam Breazeale