Oil diplomacy could define war in Ukraine

The decision of OPEC+ (Organization of Petroleum Producing Countries plus Russia) to cut world oil production by 2 million barrels a day is not enough to guarantee the resources for Russia to finance its war in Ukraine. However, she points to a possible alignment between Moscow and Arab countries – especially Saudi Arabia – which could have a significant influence on the balance of power on the planet.

But what is OPEC+ and what was it? the agreement signed last Wednesday (5)?

OPEC brings together countries such as Saudi Arabia, Iraq, Kuwait, Iran, Venezuela, Qatar, the United Arab Emirates, in addition to oil exporting countries in Africa and South America. They are 20 in total. In 2016, Russia was temporarily added to the group and that’s why the term OPEC+ is used.

They decided to decrease the world’s daily oil production by 2% (the world produces about 100 million barrels per day). This has already caused a 4% increase in the price of oil in two days. The Brent barrel was quoted at US$ 97,92 on Friday (7).

But the action takes place in the midst of the biggest energy crisis of the century, which began in 2021 (for several reasons, including the transition to clean energy) and was aggravated by the invasion of Russia to Ukraine.

Russian oil and natural gas have been boycotted by the United States and its European allies through sanctions. The West’s idea was to cut off Moscow’s source of funding for the war. But that didn’t happen. The sanctions led to a general increase in the price of oil and, even selling less energy, Russia managed to maintain its sources of revenue.

Oil reached a price of US$

this year, but the United States acted by releasing large amounts of its strategic reserve. In parallel, there was an economic slowdown in China and India began to import more oil from Russia (in part to refine and export it again, trying to evade US sanctions). In August, the price dropped below US$ 90 per barrel.

Officially, OPEC+’s decision is not justified as a support for Russia’s war. Oil-producing countries are predicting a global scenario of a worsening economy, with rising interest rates and eventually a global recession. This has the possibility of bringing down the demand for oil and consequently also the price of the commodity. The decision to cut 2 million barrels from daily production would be a kind of anticipation, an attempt to avoid this devaluation.

“The 2% reduction has a more psychological than practical effect, but it shows that Russia has influence in the group of oil producing countries”, stated engineer Armando Cavanha. He worked at Petrobras for 33 years, was CEO of energy multinationals and is currently an academic advisor at the Pontifical Catholic University of Rio de Janeiro (PUC-RJ) and author of the Cavanha.com channel.

Moscow’s approach to OPEC leaders can be understood as a defeat for US President Joe Biden in international diplomacy. During his campaign for the US presidency, Biden criticized Saudi Prince and Prime Minister Mohammed Bin Salman (known internationally as MBS) for his involvement in the assassination of Washington Post journalist Jamal Khashoggi. But in July of this year, Biden had to visit the prince and court him – to ask OPEC to increase its oil production in order to ease fuel prices.

Saudi Arabia is one of the main leaders of OPEC (the leader, in practice) and a historic ally of the United States. However, Wednesday’s decision shows that this partnership is not going as well as Biden would like.

“The world is changing. We are living in a multilateral and polycentric world order. It is no longer the order in which the United States plays the band alone, that is, it is no longer the order that reigned since the post-Cold War period”, said the political scientist and professor of international relations at the University of São Paulo (USP) Pedro Costa Júnior.

“Countries are aligning themselves according to their national interests. This strengthens Iran, Russia and Venezuela – there is also a Sino-Russian partnership today. Already the countries that are very aligned are no longer so closed with Washington. 20 years ago this would have been unthinkable”, he said.

To try to contain oil prices, the United States to release around 1 million barrels per day from its strategic reserve. But it dropped from around 630 million at the beginning of the year to 416 million barrels at the end of September. The release should end in November, as Washington cannot completely deplete its reserve for strategic and military reasons.

The US also cannot rapidly increase its own production, calculated at approximately 11 million barrels per day. It would take them more than two years to achieve a significant uplift. At the same time, according to Cavanha, the Biden administration prohibited the prospection of new oil wells within its energy transition policy.

As an emergency measure, he announced the release of more 10 million barrels from the strategic reserve shortly after the OPEC+ announcement. Biden fears that high gasoline prices could hurt the performance of his political allies in the US Congressional elections, which will take place in November.

OPEC, which has an approximate production of 41 million barrels daily, would be able to quickly expand its production – but it looks like that’s not going to happen, as Wednesday’s decision made clear.

To make the oil situation worse, European countries intend to replace natural gas that is no longer imported from Russia with oil for electricity generation.

Washington and its G7 allies, the largest economies on the planet, then try to combat the short-term rise in oil prices by imposing price controls on Russian oil exports. The idea is to set a maximum price at which Russian oil can be sold – thereby curbing the profits Moscow uses to finance the war. The price of a barrel would be well below the current US$ 97, but still above production costs.

But this is difficult to implement. Buying countries would have to accept being part of this type of cartel. To force them, the US and the European Union (EU) will try to impose restrictions on maritime insurance companies, whose operations allow the transport of goods by sea. But even within the European Union, this measure is controversial and has faced resistance – from Italy, for example.

In theory, if the price freeze works, Russia will lose tens of billions of dollars annually. However, another stream of analysts says that the measure could make oil logistics more expensive and make the price rise again. In addition, Biden and his allies will have to rely on diplomacy to convince countries outside the European Union to join the measure.

One of the main opposing countries is China, which says that oil is an item too important to be subject to price controls.

The attempt by the US and the EU to freeze prices may still be one of the factors that motivated OPEC to support Russia by reducing production of oil.

But President Biden could end up winning the arm wrestling if a global economic downturn sets in and demand for oil falls.

In the long run, he seems to bet on the transition from fossil energy to clean energy and the US intends to put at least US$ 600 billion in the sector. But not only does this not happen overnight, it will also depend on the ability of the US to acquire rare earths, types of ores that are practically only produced in China because they generate high levels of pollution in their extraction. They are the basis for green technologies.

Thus, the impression left on the OPEC+ measure to reduce oil production is that the Kremlin seems to seek a partnership with Saudi Arabia in the energy area. . If that happens, it will be difficult for Washington to impose further sanctions on Russia.

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