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October Oil Surprise: Political Interference or Market Forces?

by Senior Analyst Talal Kapoor

Already at a historically low ebb, Saudi-US ties have come under further strain since the Kingdom announced a huge oil production cut in early October to shore up crumbling oil prices, despite pressure from the Americans. The decision by OPEC+, which includes the Saudi-fronted 13-member Organization of Petroleum Exporting Countries (OPEC) along with ten other producers led by Russia, undermined Western countries' efforts to impose a cap on the price of Russian oil in response to the war in Ukraine. In Washington, this was regarded with alarm - a sign that Riyadh was siding with Russia in the conflict. The plans to restrict oil supplies and so force up prices also comes against the backdrop of midterm elections in the US, where voter anger over the state of the economy, and gasoline prices in particular, imperils the president's agenda.

To all appearances, the decision seemed a deliberate snub, if not an outright slap in the face, to President Biden, whose party stands to lose its Congressional majority, and who made a personal outreach to the Kingdom's de facto leader, Crown Prince Muhammad bin Salman (known as MbS), despite having promised to treat him like a "pariah" on the campaign trail. Making the optics even worse, reports suggest that more aggressive cuts took place than originally planned, and in spite of a 3.5 million barrel per day (bpd) production shortfall, belying the claim that the measures were due to the urgency of the economic situation. In fact, Saudi pushed the oil cut twice as much as the cartel had intended. After Russia had sought to implement a 1 million bpd cut in September, OPEC+ announced on October 5 that it would double that cut by 2 million bpd, purportedly under Saudi pressure. This, of course, added fuel to the fire.

The Americans, infuriated, railed against the "shortsighted decision". Biden warned of "consequences", and promised to act "methodically", with a sweeping review of US-Saudi relations. Senior lawmakers have proposed a one-year freeze on weapons sales, with some calling to go much further (though corporate interests have been notably quiet). Saudi went on the defensive, the official line being that the country does not politicize oil or oil decisions. The defense minister, Khalid bin Salman, said the decision by OPEC+ to cut oil output was taken unanimously and for purely economic reasons, arguing that the decision was based on goodwill and aimed at stabilizing the energy market. Khalid (brother of the crown prince) also said he was "astonished" by accusations that the Kingdom was "standing with Russia in its war with Ukraine."

Historical context, however, strongly suggests that output decisions are often influenced by the relationship between the Saudi king and American president. Emboldened after the foundation of the OPEC cartel, which wrested control of the market from private enterprise and what was seen as the unfair exploitation of producing countries, Saudi flexed its newfound muscle in response to the Yom Kippur war, when an outraged King Faysal orchestrated an embargo in retaliation for President Nixon's request for billions in emergency aid for Israel, seen as a betrayal of long-standing regional commitments. Oil imports from participating Arab nations abruptly ceased, leading to drastic production cuts which saw US gasoline prices skyrocket 350% in the years 1973-74. The oil embargo had a decisive impact on the US economy, with a corresponding and traumatic shock to society.

Despite public declarations of goodwill and economic exigency, the Saudis are acutely aware of the pivotal role they play in US domestic politics, at times even seeming to boast of it. Bandar bin Sultan, a former Saudi ambassador to the US, admitted as much, boasting during a 2004 news program that "the Kingdom's oil decisions can influence the election or non-election of the president of the United States, the largest and strongest country in the world."

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