Biden snubs Russia as the West snubs Russia’s friendship with Russia
Joe Biden, during his presidential campaign, pledged to make Saudi Arabia an internationally recognized pariah. After that came high inflation and war. Biden finally gave up on his words in July and went to Jeddah with the Crown Prince Mohammad Bin Salman.
However, Biden had hoped MBS, the King’s ruler, would increase Saudi Arabia’s oil production during a time of rising crude prices and an inflation surge, but he was disappointed.
Instead, the Opec cartel, a group of oil-producing countries led by Saudi Arabia, cut output by 2,000,000 barrels per day in October to push prices higher. It is now cutting production again, ignoring the threats of an angry US President.
While Biden watches powerlessly, Vladimir Putin is most likely to be one of the greatest winners.
Opec +, a larger group of 23 countries, announced on Sunday a voluntary output reduction of 1.2m barrels per daily from May to the end of this year. This represents 1.1pc global supply.
Oil prices rose immediately as a result. They will rise further. Brent crude oil rose from $79.77 per barrel on Sunday to $85.02 Monday.
Goldman Sachs has increased its Brent crude oil forecasts for December 2023 from $90 to $95. Prices will rise to $100 by December 2024.
According to Bjarne Schieldrop (chief commodity analyst at SEB Financial Services), these prices will become the new norm. It will undoubtedly cause pain for millions of consumers by higher prices at the pumps, and higher costs in the shops.
Threefold is the blow to the West. Inflation will continue to rise due to high oil prices. This is a sign that Saudi Arabia is abandoning the West and turning towards China. The rising oil prices will also affect sanctions against Russia, where oil profits are expected to rise.
According to Benjamin Hilgenstock (author of a report about Russian sanctions for Centre for Economic Policy Research), every $1 in crude oil increases Russian export revenues by approximately $2.7bn per year.
An increase of $10 in oil prices will result in an increase in Russian oil export revenues of around $27bn-145bn. This is 22.5 percent more than CEPR predicted before the Opec decision.
Western sanctions against Russian oil were not implemented until too late. Only in December 2022, the EU imposed an embargo against crude oil and on products of oil in February 2023. According to Hilgenstock, Russia enjoyed high oil prices for the majority of last years and saw its current account surplus reach a record level. Before Opec, revenues were already under pressure.
“This is Saudi Arabia telling Russia that Russia is our friend.” Schieldrop says that they are siding with Russia and China.
We will have a tighter oil market after the Opec cuts. Russia will be able charge a higher price for oil, receive a better income and be able more easily to finance the war against Ukraine. This will counteract the West’s sanctions.
Saudi Arabia’s natural instinct is to make this move because Asia will be the largest source of future oil demand.
Russia is open to other nations as long as the oil price is not above a certain level. This is required if the countries want to use the shipping and transport services of the EU and the OECD club rich nations. China, for example, does not have to rely on these services and has no restrictions.
Russian oil exports have increased to China and India since the war. According to CEPR, December 2022 saw an increase in overall exports than December 2021.
As Russia makes a lot of money, so will the West.
It acts as a tax on global economic activity. Schieldrop says it works in the same way rate hikes do, but has a slower effect.
Although headline inflation is unlikely, it’s because oil prices are so high last year. However, the Opec cut means that prices will remain higher for longer.
It highlights the Opec’s willingness and ability control prices. This means that even if there is an economic downturn where some of the weaknesses could have been mitigated by lower input prices, it will not happen,” Ole Hansen from Saxo Bank’s Commodity Strategy, says.
In particular, markets that depend on oil will see prices rise. According to Tamara Basic Vasilijev (senior economist at Oxford Economics), transportation will be under attack when it comes to sectoral sensitive. According to the AA for every $2 increase of oil’s value, there is a 1p increase in petrol prices.
Hansen says that farm machinery costs will rise, which will put further pressure on food prices.
He says, “We have seen soybeans prices and corn prices rise from Friday.”
This is a major power play by Saudi Arabia. It announced the cuts after America stated that it would not increase global demand by replenishing strategic stocks.
America and Saudi Arabia have had strong ties in the past. Saudi Arabia is America’s largest foreign military sale customer. According to James Swanston, Capital Economics’ Middle East and North Africa economist, relations reached their peak when Donald Trump became president. Trump was firm on Iran. Relations with President Joe Biden, who campaigned with an anti-Saudi stance has deteriorated.
Swanston says that “one thing almost on a personal basis was that the Crown Prince Mohammed Bin Salman took offence at the fact that President Biden had always wanted to speak with King Salman himself rather than MBS.”
After a long period of low prices due to fracking, the Opec decision takes advantage that US shale output is approaching a peak.
Opec Plus is pretty much a free card because of the slowing growth in US Shale Oil since December 2022.
They can now do whatever they like and control the oil market as much or little as they wish. Shale is not growing at an alarming rate. This was a huge, major change in the oil market. Schieldrop says that the next five years will be quite different. Opec does not fear losing market share on the global oil market.
Opec claims that the new cut was made in response to declining global demand. However, it is possible that expectations of a slower world economy are exaggerated.
India and China are still major importing countries. This means that global aviation is recovering from the post-lockdown.
“We are extremely bullish on global oil demand. Schieldrop says that global oil demand will continue to grow and that Opec has a good and steady hand and will maintain the price at the level they choose.”
It appears that the global oil market was in balance, and might have experienced a slight surplus towards the end. We will now be in a deficit. Swanston says that there does seem to be a Saudi Arabia-first policy.
America is losing ground as China, Russia, and Saudi Arabia become closer to each other. Rumours circulated last year that Saudi Arabia may accept renminbi to pay for its oil exports. These have always been priced using dollars.
This would be a nuclear option, and it remains highly unlikely that such a change will occur in the near future. It is no longer possible, however, as America’s once closest Middle Eastern ally drifts into orbit with other autocracies.