The Decision Indirectly Impacts Inflation, Interest Rates, And Russia’s Brutal Assault On Ukraine
September 19, 2023—As oil prices prop up inflation and the Russian war economy, policy decisions impacting oil are significant. So it matters when two of the world’s largest oil-producing countries make a deal to restrict output to push up prices. The two countries are Saudi Arabia and Russia.
As oil prices continue to rise so does the scrutiny of Saudi Arabia’s decision to side with Russia.
The Price of Oil
This story starts with a look at the cost. The price of oil rose in August and again in September to $92 a barrel WTI (U.S.) and $95 a barrel Brent (British). On average, oil output from OPEC countries also jumped month-on-month by 6 percent, according to OPEC’s September report.
The Saudi-Russian-Deal
In July, Saudi Arabia and Russia announced a deal to make cuts in oil production. The two countries are the most powerful ones in the OPEC+ oil cartel. They are also two of the world’s leading producers of oil. The United States is the first.
For much of 2023, oil prices have moderated. That helped to bring down inflation rates. But the production cuts mean higher prices per barrel. Oil prices are based on global supply and demand and are priced in U.S. dollars. For the Saudis, the higher price of crude means more money for changing their economy towards investments. For Russia, it means more money to fund the war on Ukraine.
Despite Western sanctions, high inflation, and a depreciating ruble, Russia’s economy is holding up. Oil sales are a big part of that.
Oil Demand
Still, the output is only half the picture. Globally, oil demand is rising just over 2 percent year-on-year. Furthermore, the largest oil consumer is the United States. Oil is the largest source of U.S.-based energy consumption, with natural gas falling a close second.
OPEC noted that demand is rising in the United States due to “growing jet fuel demand and expanding gasoline requirements.” Meanwhile, in the non-OECD region, including China, consumption is growing based on “a steady increase in transportation and industrial fuel demand.”
It’s fair, therefore to say demand may be the larger issue. According to the OPEC cartel, global production of oil remained mostly unchanged in August. (See OPEC’s September report on page 50.) Output from China and Eurasia, meanwhile, offset production cuts in Russia. Also, U.S. production from shale held steady.
Now, back to the politics of the matter.
Deal Extension
This month, Saudi Arabia and Russia extended their pact, limiting output through the end of the year. That increases geopolitical tension, particularly between the Saudis and U.S. politicians. As the price of crude continues to rise so does the scrutiny of Saudi Arabia’s decision to side with Russia.
Who’s Buying? Sales To China And India
First, the Saudi-Russian deal appears to be working for the partners. The Russia-Ukraine war doesn’t appear to have an end in sight. Despite Western sanctions, high inflation, and a depreciating ruble, Russia’s economy is holding up. Oil sales are a big part of that.
Sales of Russian oil surged in August, according to reporting by the International Energy Agency, by $1.8 billion to $17.1 billion. The IEA says ” higher prices more than offset lower shipments.” Moreover, purchases by China and India accounted for more than half the sales.
The agency warned the deal to cut production through the end of the year may “lock in a substantial market deficit.” The Kingdom rejected that notion but it made headlines in the West nonetheless.
Saudi’s Comfort Zone May Cause Stress
On Monday, Saudi Arabia’s energy chief defended the decision.
“We can reduce more, or we can increase, that has been a subject that we want to make sure that the messaging is clear, that it’s not about, again, this jacking up prices,” Prince Abdulaziz bin Salman told the World Petroleum Congress in Calgary, Canada. “It’s about deciding at the right time when we have the data, and when we have the clarity that would make us in much more of a comfort zone to take that decision.”
As Saudi Arabia seeks its pricing comfort zone, it is likely to put increasing pressure on the West. Inflation is inching up in the United States at the same time that rising interest rates are having more effect on the economy.
