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[0] 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.
[1] 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.
[2] I'm Daily Wire, editor -in -chief John Bickley, with Georgia Howl.
[3] It's Sunday, April 9th, and this is an extra edition of Morning Wire.
[4] Hey, guys, producer Brandon here, inflation has consequences.
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[11] Joining us to discuss is Christian Coates -Ollrickson, Middle East Research Fellow at Rice University's Baker Institute.
[12] Welcome, Christian.
[13] So tell us about OPEC's decision to cut oil production.
[14] How much are they cutting?
[15] Well, the announced cuts about 1 .7 million barrels a day in total, if you include Russia's previously announced, $500 ,000.
[16] So that's a significant cut.
[17] I think part of it will depend on how much actually.
[18] is removed for the market.
[19] When OPEG 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.
[20] So the ultimate amount that was taken off the market was less than it had been announced.
[21] Having said that this time around, the Saudis, the Russians and others who have announced their plans to cut production, were producing much closer to their quotas, so it's more likely that we will see a million -plus barrels of oil taken off the market every day as a result of the announcement.
[22] How will this impact cost?
[23] Should Americans expect this to drive oil prices and the prices of other goods up?
[24] Absolutely.
[25] The price of oil went up by over 8 % straight away.
[26] It went up to about $85 a barrel.
[27] It seems to have studied, but certainly if there's the exception, that we could see more cuts and especially as the oil market tightens.
[28] If demand from China, for example, continues to increase, as China further moved away from its pandemic restrictions, there will see a tight oil market, we'll see less room for maneuver, and we'll probably see a higher price.
[29] And that will feed into higher gasoline prices, into higher costs of commodities and supply chain issues, which will contribute to the cost of living pressure that we have seen over the last two years, so it certainly won't help.
[30] Why did this move come as a surprise to most of the developed nations?
[31] 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.
[32] There would be no change, in fact, as recently as last week.
[33] That was the message being sent from Riyadh, and many analysts took him at his word, and so the expectation had been that when the monitoring committee met on Monday morning for OPEC plus, they would simply continue with the agreement that they had made in 2022.
[34] And so to have suddenly the day before on a Sunday morning this coordinated series of announcements outside of the process, this wasn't an official OPEC plus meeting, It was a series of coordinated announcements outside that framework.
[35] That's why it took everyone by surprise.
[36] And why has Saudi Arabia made this decision?
[37] What's behind this?
[38] It seems that the decision has been made by the Saudis to join Russia in announcing a cut of 500 ,000 barrels a day.
[39] From a Saudi perspective, I think the decision has been made to that they would like oil prices to be higher than they have been.
[40] They've been in the $70 to $80.
[41] price range.
[42] Mohammed bin Salman, the crown prince of Saudi Arabia, he's in the middle of Vision 2030, his ambitious plan to transform the kingdom away from oil.
[43] Ironically, he needs higher oil prices to generate revenues to pay for the projects he's trying to push through.
[44] And he may be wanting or believing that he needs prices to be in the $90 to $100 range to generate those revenues just because there's also been less foreign investment into Saudi Arabia than had been anticipated, and so the Saudis are having to pay for the projects to a much greater degree than they is planned.
[45] Focusing in on Russia here, how does slashing production impact them?
[46] 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.
[47] in Ukraine.
[48] Clearly, the Russians will benefit from higher prices, especially if they can evade the price cap by selling oil to other states that don't necessarily abide by it.
[49] So certainly from Vladimir Putin's perspective, it will be a welcome generator of revenue as, of course, his war continues into a second year with no sign of its slowing down.
[50] And what about China?
[51] How does this move affect them?
[52] Well, the Chinese have already made a series of major agreements with Saudi Arabia in the last couple of weeks, actually.
[53] And so it remains to be seen whether those agreements are some sort of buffer against higher prices.
[54] Certainly the Chinese will not want to pay more than they were paying for oil.
[55] Having said that, they've already been purchasing a lot of oil heavily discounted from Russia.
[56] And so that might be a buffer for the Chinese against these higher prices.
[57] 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.
[58] Are warnings about this being oversold?
[59] It's interesting because in October last year, when OPEC -plus announced their 2 million barrel cut, there was a huge reaction from the U .S. political spectrum, from across the spectrum, including from the White House.
[60] And the response this time has been much more muted.
[61] In fact, there's been almost no response at all.
[62] And I get the sense that the White House is trying to project an image of, it's okay, we have factored this into our thinking, and to sort of try to counter the notion that OPEG plus is in control of the oil market.
[63] And certainly from the White House perspective, they're trying to sort of generate that image of a steady momentum that they don't see being locked by this latest announcement.
[64] How does the U .S. oil reserve play into this situation?
[65] They still have a lot of oil in the reserve.
[66] They've drawn down heavily over the past year.
[67] And the expectation, I think, had been that the administration would begin to refill the reserve.
[68] They would start purchasing oil.
[69] And that didn't seem to have happened.
[70] And certainly there had 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 break, a breach of faith in any agreement they thought they had with the administration from last year.
[71] from when President Biden went to Saudi Arabia last summer in July, and that's certainly being touted in some quarters as a way that this is a sign of Saudi displeasure that the administration hasn't held up its end of the bargain.
[72] Now, of course, you know, recollections may differ in different parties, and certainly a sign I think of different parties having very different expectations of where oil and energy markets are going.
[73] The Biden administration has really leaned heavily into its green agenda.
[74] how does this all figure into the push for renewable energy?
[75] Well, the administration is really pushing hard on renewable energy.
[76] It's also pushing hard on the energy transition.
[77] 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.
[78] And this is going to be, I think, an issue that causes persistent friction that continues to drive the U .S. and Saudi Arabia further apart.
[79] Clearly, the Saudis have a vested interest in maintaining it.
[80] strong demand and strong value in oil and gas, even as the administration has pushed through the Inflation Reduction Act, with all of its support for renewables, which if they get fully ramped up, will have an impact, especially if they can also be accompanied by measures such as the electrification of transportation systems, which would have a much more significant impact on oil demand in the near future, and certainly in the next couple of decades.
[81] And stepping back here, what should we take away from Saudi Arabia's move this week?
[82] Well, we see the Saudis certainly moving closer to China.
[83] We saw the announcement of the Saudi -Iran deal to restore relations broken in China.
[84] The Saudi -Iranian foreign ministers are meeting in China tomorrow.
[85] And we certainly see the Saudis signaling that their view of the 21st century multipolar world certainly doesn't only include the U .S. and this is another sign, I think, of that strategic divergence that the Washington -Read axis is not necessarily fracturing, but certainly is moving in different directions.
[86] Well, with China and Russia continuing to make aggressive moves, the role of oil will be even more important here.
[87] Christian, thank you for coming on.
[88] That was Christian Coates -Hulrickson, Middle East Research Fellow at Rice University's Baker Institute, and this has been an extra edition of Morning Wire.