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--:-- John Bickley: OPEC announced this week that it will be slashing oil production, a move that caught many Western countries flat-footed and sparked fears of further spiking inflation. In this episode, we talk with an expert about the financial and political implications of the abrupt cut in oil production and how it could hurt the U.S. and potentially help China and Russia.
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--:-- John Bickley: Joining us to discuss is Christian Coates Ulrichsen, Middle East Research Fellow at Rice University's Baker Institute. Welcome, Christian.
--:-- Christian Coates Ulrichsen: Thank you for having me.
--:-- John Bickley: So tell us about OPEC's decision to cut oil production. How much are they cutting?
--:-- Christian Coates Ulrichsen: Well, the announced cuts about 1.7 million barrels a day in total, if you include Russia's previously announced 500,000. So that's a significant cut. I think part of it will depend on how much actually is removed from the market. When OPEC Plus announced a 2 million barrels cut in October last year, the actual cut was actually less than a million barrels a day just because some of the producers had been producing under their quotas anyway.
--:-- John Bickley: [interrupting] So, how will this impact cost? Should Americans expect this to drive oil prices and the prices of other goods up?
--:-- Christian Coates Ulrichsen: Absolutely. The price of oil went up by over 8% straight away. It went up to about $85 a barrel. It seems to have stabilized. But certainly, if there's the expectation that we could see more cuts, and especially as the oil market tightens, if demand from China, for example, continues to increase as China further moves away from its pandemic restrictions, then we'll see a tighter oil market. We'll see less room for maneuver, and we'll probably see a higher price.
--:-- John Bickley: [pausing] Why did this move come as a surprise to most of the developed nations?
--:-- Christian Coates Ulrichsen: It came as a surprise because the Saudi energy minister, Prince Abdulaziz, who is actually the brother of the crown prince, had spent weeks, if not months, telling people that the output agreements announced at the OPEC Plus meeting in October last year would be maintained, that there would be no change.
--:-- John Bickley: [interrupting] And what about Russia? How does slashing production impact them?
--:-- Christian Coates Ulrichsen: Well, Russia has been under considerable pressure with the price cap that has been pushed by Western states as a result of concerns that Russia was profiteering from high oil and gas prices to fund its war in Ukraine. Clearly, the Russians will benefit from higher prices, especially if they can evade the price cap by selling oil to states that don't necessarily abide by it.
--:-- John Bickley: [pausing] And what about China? How does this move affect them?
--:-- Christian Coates Ulrichsen: Well, the Chinese have already made a series of major agreements with Saudi Arabia in the last couple of weeks, actually. And so it remains to be seen whether those agreements are some sort of a buffer against higher prices. Certainly the Chinese will not want to pay more than they were paying for oil.
--:-- John Bickley: [interrupting] The White House has assured the public that this won't be as bad as we might think in terms of the impact on inflation. Are warnings about this being oversold?
--:-- Christian Coates Ulrichsen: It's interesting because in October last year, when OPEC Plus announced their 2 million barrel cut, there was a huge reaction from the US political spectrum from across the spectrum, including from the White House. And the response this time has been much more muted. In fact, there's been almost no response at all.
--:-- John Bickley: [pausing] How does the U.S. oil reserve play into this situation?
--:-- Christian Coates Ulrichsen: They still have a lot of oil in the reserve. They've drawn down heavily over the past year. And the expectation, I think, had been that the administration would begin to refill the reserve. They would start purchasing oil. And that seemed to have happened, and certainly there have been some who have suggested that the Saudis felt that the fact that the administration didn't start buying back oil that it had released was somehow a lack of a breach of faith in any agreement they thought they had with the administration from last year, from when President Biden went to Saudi Arabia last summer in July.
--:-- John Bickley: [interrupting] The Biden administration has really leaned heavily into its green agenda. How does this all figure into the push for renewable energy?
--:-- Christian Coates Ulrichsen: Well, the administration is really pushing hard on renewable energy. It's also pushing hard on the energy transition. And of course, the whole notion of what an energy transition means looks very different in Washington, D.C. than it does, for example, in Saudi Arabia.
--:-- John Bickley: [pausing] Stepping back here, what should we take away from Saudi Arabia's move this week?
--:-- Christian Coates Ulrichsen: Well, we see the Saudis certainly moving closer to China. We saw the announcement of the Saudi-Iran deal to restore relations broken in China. The Saudi and Iranian foreign ministers are meeting in China tomorrow. And we certainly see the Saudis signaling that their view of the 21st century multipolar world certainly doesn't only include the U.S.
--:-- John Bickley: [interrupting] Christian, thank you for coming on. That was Christian Coates Ulrichsen, Middle East Research Fellow at Rice University's Baker Institute.
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--:-- John Bickley: And this has been an extra edition of Morning Wire. Thank you.
