Last week, the Organisation of the Petroleum Exporting Countries (OPEC+) announced its decision to cut output by 2 million barrels per day from November. The International Energy Agency (IEA), a Paris based intergovernmental agency, warned this could tip the global economy into recession. OPEC+ constitutes OPEC and its non-OPEC allies, such as Russia.

The IEA warned that OPEC+’s decision to cut supply has sparked higher prices, and with unrelenting inflation pressures and higher interest rates, this may be the “tipping point for a global economy on the brink of recession.” The IEA did add that likely losses will be closer to 1 million barrels per day rather than 2 million. Saudi Arabia and the UAE will deliver most of the reductions.

OPEC+'s decision comes amidst a new EU plan, endorsed by the G7 club of wealthy nations, to impose a cap on prices for Russian oil exports. The aim of the sanctions is to deprive Russia of key revenue as a consequence of the invasion of Ukraine.

A Strain on Saudi-US Relations

US President Joe Biden has said OPEC+’s decision will have “consequences” for US-Saudi relations. Washington sees the move as a snub from Saudi and as siding with Russia, which Saudi Arabia rejects. The oil giant said that the decision was not political but instead based on market forecasts. The Saudi foreign ministry commented that OPEC+’s decision took into account the balance of supply and demand and was aimed at curbing market volatility. OPEC+ may have foreseen a potential global recession, during which demand and prices would most likely fall. Therefore boosting the price of oil now could help offset this and shield producers from a sharp drop in demand.

The US could potentially retaliate by freezing cooperation with Saudi, such as halting weapons sales. Another option is going after OPEC with US legal channels, such as the NOPEC Bill. The NOPEC bill (No Oil Producing and Exporting Cartels) would classify OPEC as a cartel, subjecting its members to antitrust legislation. The bill is intended to protect the US from artificial oil spikes, however it has yet to be signed into law after passing a Senate committee in May. The bill could expose OPEC countries and allies to lawsuits for coordinating supply cuts that raise global oil prices. OPEC ministers have criticised the potential NOPEC bill, saying that it could bring “greater chaos” to energy markets.

Analysts point out that OPEC+’s decision highlights a lack of US power to influence Saudi OPEC+ policy. US imports of Saudi oil have shrunk in recent years, and more than 80% of the Middle East’s crude exports now go to Asia. But if the US chooses to retaliate against Saudi, it could backfire and send global markets into further disarray. Tensions are already high, and a breakdown in US-Saudi relations would risk higher premiums from the Middle East and overall higher oil and fuel prices. The US must tread carefully ahead of mid-term elections in November.

Fuel prices are already on the rise in the UK. Nearly half a penny was added to average petrol prices over the weekend and diesel prices are on the rise again, The Guardian reports. Prices are climbing for the first time in three months, having fallen since July. According to the motoring organisation the AA, average pump prices rose to 162.78p a litre on Monday, up from 162.32p. Average diesel prices rose from 180.45p before the weekend to 182.17p on Monday.

(Sources: Reuters, Foreign Policy, CNBC, The Guardian)