Author: Dhruv Muralidhar, Graphics: Bella Aharonian
The BRB Bottomline:
The Organization of the Petroleum Exporting Countries (OPEC) made waves by announcing an unprecedented production cut, which could send global gas prices soaring. What are the geopolitical implications? What does this mean for American consumers? How can we protect ourselves in the short and long terms?
It’s been a volatile two years for oil. The pandemic killed demand for gasoline as the world shut down, sending prices to their lowest levels in decades. Then, as the world started to open, Russia began its invasion of Ukraine, and the resulting NATO sanctions of Russian oil caused global prices to soar. Europe, as a pure energy importer, was hit especially hard, but Americans have been feeling the pinch too.
As an arguably late response, the Biden administration utilized the strategic petroleum reserve and aggressive public purchasing to bring the price at the pump down. That, coupled with cooling global demand as summer waned, resulted in over 13 weeks of price decline — welcome news to global consumers being hammered by a cost of living crisis.
That bliss was shattered last month when OPEC announced a new production cut that would shrink the global oil supply in the midst of an energy crisis. As the world reels from this announcement, let’s take a few moments to examine OPEC and its role, as well as how America can protect its national and consumer interests by reducing its dependence on foreign fuel sources.
What is OPEC and OPEC+?
OPEC is an international and intergovernmental organization that was founded in 1960 by the countries of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Today, OPEC has 13 member states that span three continents. According to its mission statement, OPEC seeks to “coordinate and unify the petroleum policies of its Member Countries” with three main goals: consistent supply of petroleum to consumers, regular revenues for producers, and profitable returns for investors.
OPEC+ consists of another 10 crude oil exporting countries in addition to the 13 OPEC member states. OPEC+ controls 55% of global crude oil supply and 90% of the world’s proven oil reserves. This collective lion’s share, of course, grants OPEC+ tremendous influence and power over the world economy — and as large energy exporters, its individual member states are also considerable geopolitical players in their own right. Oftentimes, OPEC will consult OPEC+ to make production decisions in the name of market stability.
As OPEC production and pricing decisions have tremendous impacts on the global petroleum supply, its decisions are scrutinized by financiers and politicians alike. Some consider OPEC to be a cartel, colluding to profiteer off of the largely inelastic demand for oil, while others argue that OPEC policies maintain stability in the international market.
The New Policy
After an October 5th meeting in Vienna, OPEC+ released a statement outlining the key takeaways from the meeting. While most of the statement surrounded the frequency of future meetings and other administrative minutiae, it also contained the announcement that generated shockwaves around the world: the decision to reduce oil production by 2 million barrels per day.
What They Say
OPEC claims that its production cut is in the best interest of the global market. In a recent public statement, OPEC’s Secretary General Haitham al-Ghais said that after “monitoring economic developments worldwide,” the organization stands “ready to intervene for the benefit of oil markets.” It appears that, in the interest of price stability, OPEC is willing to vary its production levels. On its face, this course of action seems reasonable. After all, stability is important in any sector of the economy, especially one as vital as energy. But there is more to the picture than what OPEC is willing to publicly acknowledge.
The world is in the midst of a cost of living crisis, in part driven by a greater energy crisis. And to be clear, the fault of this crisis cannot all be put on OPEC. While Russia is a member of OPEC+, it’s hard to imagine Putin consulting the group before launching his brutish attack on Ukraine. OPEC similarly did not create the supply chain issues which have exacerbated inflation, nor did it encourage corporations to price gouge essential goods and services.
That being said, any student in Econ 101 will tell you that supply is a large contributor to price. By controlling a majority of the oil supply and colluding on how and when to sell it, OPEC has tremendous power over the economic climate of the global economy. Not only will driving become more expensive, but since petroleum is used to make many consumer goods, from clothing to medicine, a constricted supply will also cause price surges across various industries. Essentially, a handful of countries, in the name of economic stability, can upend the pocketbooks of billions of consumers in every corner of the world.
In the United States, energy consumption as a percentage of income is regressive, meaning that while it only accounts for a burden of 4.1% for high-income earners, it skews to 13.8% for low-income households. Those making less than $20,800 annually have an energy burden of a whopping 18.3% of their income. In other words, while everyone will be impacted, the most impoverished segments of the population are the ones most likely to bear the brunt of rising energy prices. As winter arrives, heating expenditures are due to rise, literally leaving many out in the cold.
Stepping away from economics, OPEC’s decision has far-reaching implications for world affairs. It’s no secret that Russia, a member of OPEC+, stands to benefit greatly from the production cut; in fact, Russian spokesperson Dmitry Peskov called it “balanced [and] thoughtful.” It’s clear why Russia would have such glowing praise. When oil prices go up, the value of Russian oil increases, and when Russia sells oil to countries like India and China, who do not have sanctions in place, they will have increased profits which can then be used to finance their struggling military excursion in Ukraine. In a press briefing following the October meeting, White House Press Secretary Karine Jean-Pierre said that “it’s clear that OPEC+ is aligning with Russia.”
The move also creates an increasing strain between Saudi Arabia, the de facto leader of OPEC, and the United States. As the Biden administration tries to salvage its Middle Eastern alliances in the face of uncertainty and unrest in the region, this decision breaks the détente.
The domestic political consequences of the OPEC decision can be earth-shattering. Although Democrats avoided the midterm shellacking that many thought was coming their way, voter frustration with the state of the economy persists.
The Biden administration has by no means curtailed the human rights abuses and regressive policies of the Saudis, but it has certainly gone further than past administrations have. In his first meeting with Crown Prince Mohammed bin Salman, President Biden brought up the murder of Washington Post journalist Jamal Khashoggi in a Saudi embassy (American intelligence agencies believe that the Crown Prince approved the killing). After the production cut was announced, the administration said that it was considering discouraging American companies from expanding business dealings in Saudi Arabia, which would strike a blow to the country, which is currently attempting to entice foreign investments and rehabilitate its image.
Some political analysts say that the production cut is meant to, in part, hurt Biden and the Democrats by tying them to rising prices both at the pump and in the supermarkets. Given Former President Trump’s closeness to the Saudi government through the $2 billion they gave his son-in-law Jared Kushner, the Saudis could very well wish for a second Trump term in two years and the more favorable policies that would follow.
Issues with Foreign Energy Independence
The Saudi Bind
Though proponents tout the geostrategic importance of having Arab allies in contributing to peace in the region, the American alliance with Saudi Arabia has long been seen by critics as hypocrisy fueled by reliance on fossil fuels. Critics see Saudi Arabia as a repressive regime that cracks down on journalism, discriminates against women and religious minorities, and sanctions the abuse of migrant workers.
Because American politicians don’t want to alienate the country that controls their oil and, therefore, arguably controls their political destinies, there has been for decades a bipartisan effort to appease the Saudi royalty. The United States is the largest arms exporter to Saudi Arabia, and earlier this year, the State Department approved a sale of $3 billion worth of Patriot missiles. Despite the fact that these weapons are being used in highly questionable ways in the Saudi war in Yemen, it was only recently that calls came to end this military relationship.
Relying on Saudi Arabia and its OPEC allies for oil means that we, as Americans, despite our supposed espousal of equality and humanity for all, are, at best, ignoring and, at worst, enabling atrocities halfway around the world.
Case Study: 1970s America
For those who have studied history, America’s issues with foreign oil cabals are not new. Arguably, the most famous example is from the 1970s when, in response to American military support for Israel, the Organization of Arab Petroleum Exporting Countries set an oil embargo on shipments to the United States. The embargo quadrupled the price of crude oil and caused gas shortages around the country. Cars lined up outside gas stations as people feared not being able to commute the next day. While the embargo ended in 1974, its effects could be felt for years after, and many consider it a leading contributor to the recession of the mid-1970s.
Case Study: Present-Day Germany
But you don’t need to be a history buff to see how foreign energy dependence can go awry — just take a look at Germany. Prior to the NATO sanctions, about a third of German gas was supplied by Russia. And then, with little warning or opportunity to prepare, that supply was cut off. The average price of gasoline in Germany today is $7.26 per gallon. To put that in context, the average price of gasoline in the United States is $3.67 per gallon, meaning Germans pay twice as much for gasoline as Americans. Now, with winter approaching, the price of fuel is only going to go up, eating away at people’s paychecks in the midst of rising prices across the board.
American Fuel for American Life
All of this begs the question, why do we have to concede to the whims of foreign governments? Americans are not used to being geopolitical pawns, and energy is one of the few arenas where the United States government cannot often dictate its own terms.
This predicament does not need to be the case. I have written in the past about how ensuring a solid manufacturing base for essential goods is vital for national security. Energy is no different. Without a secure grid with steady prices, Americans risk having their lives disrupted every time OPEC decides to change its operations. Tapping the aforementioned strategic petroleum reserve is not a sustainable solution; this year’s activity has caused it to dip to its lowest capacity in almost 40 years. Energy autonomy is the best way for the United States to provide for its people while maintaining its values abroad.
The False Dichotomy: Environmentalism
Partly due to the phrase “energy independence” becoming a code in right-wing circles for drilling and fracking on American soil, the concept of energy self-reliance has become associated with fossil fuels. And while, yes, in the near term, fossil fuels will continue to make up the majority of America’s energy use, it does not need to always be the case.
American energy does not need to be synonymous with American oil or coal; it can mean American solar, American wind, and American nuclear. Legislation like this summer’s Inflation Reduction Act will be key going forward, investing in domestic clean energy to ensure that our country is ready for the needs of the future. Providing loans for individuals and corporations to switch to clean energy is just the start. Creating a two-tier tax system for energy companies, with a lower tax rate on profits from clean energy and a higher tax rate on profits from fossil fuels, is one way to incentivize energy providers to re-evaluate how they power the grid. It is entirely possible for us to reorient our country to run on clean, domestic energy, but we must start the transition now.
The Final Take
OPEC’s recent production cut announcement has only clarified the importance of American energy independence. By continuing to pay fealty to countries, like Saudi Arabia, who do not share our values, we are making a dangerous statement that American morality is for sale — that as long as your country has something we cannot live without, we will turn a blind eye to your misdeeds. This rationalization has unfortunately been the mainstream political philosophy of both major parties, but it has to end now.
Energy is too vital a sector to leave to the inclinations of foreign powers, many of which are not the strongest of allies. The transition will take time and billions, perhaps trillions of dollars, but every second and every penny will be worth it. As we look to tackle the challenges of the 21st century, we cannot afford shortages and rationing. Our leaders need to take charge today if we want the lights to be on tomorrow.
- OPEC has announced that it will be cutting production by 2 million barrels per day
- The move has sparked a backlash by the United States and NATO, who claim it will benefit Russia
- Consumers will see rising energy prices over the next few months in addition to inflation in other sectors
- Foreign energy dependence poses numerous ethical and geostrategic issues for the United States
- A path of energy independence is the smartest and most secure one going forward