While initial reactions were more muted in the European Union, the production cut comes as the bloc of 27 nations braces for a sharp slowdown in economic growth linked to higher energy prices. The E.U.’s industrial powerhouse, Germany, reported a worse-than-anticipated decline in manufacturing orders on Thursday, raising recession fears.
OPEC, allies move to slash oil production, eliciting blistering White House response
Simone Tagliapietra, a senior fellow at Brussels-based economic think tank Bruegel, said the production cut “will sustain inflation and make Europe’s energy crisis even more complicated.”
It also makes the Group of Seven (G-7) price cap on Russian oil, which has just been given the green light by E.U. countries, “less impactful,” he said.
While the production cut is expected to increase prices at European gas stations, the extent of the rise was not immediately clear. Oil prices could still exceed $100 per barrel, analysts said. Even before the production cut was announced, European business groups worried about companies replacing increasingly expensive natural gas with oil, which could drive gas station prices upward.
Over the summer, many European nations tried to shield consumers from rising gas prices through subsidies and tax breaks. But similar intervention to tackle surging electricity and natural gas prices this fall has strained budgets, leaving some countries with diminished leeway to respond to Wednesday’s announcement. Germany’s increasingly precarious economic situation could also stand in the way of stronger E.U. action.
Those factors could weigh heavily this winter, compounding the possibility of shortages of natural gas and electricity, blackouts and the narrowing of European companies’ profit margins. The concerns, however, were not immediately reflected on European markets Thursday. Germany’s leading index, Dax, and the European Stoxx 600 initially made slight gains. Oil held at near $88 a barrel on Thursday, according to Bloomberg.
In European capitals, the production cut could pose immediate geopolitical challenges, however.
Just hours before the OPEC Plus decision, E.U. member states had on Wednesday agreed to its own cap on the price of Russian oil as part of the bloc’s eighth round of sanctions over the war in Ukraine.
The idea behind the cap is to set the price of Russian oil above the cost of production, but below market price, keeping the oil trade going while limiting Russian revenue.
Under the sanctions, E.U. and G-7 officials will meet to set the price, adjusting the level in response to market conditions, according to E.U. officials. Member states will need to unanimously approve the decision.
To ensure compliance, the sanctions make companies involved in the transport of Russian oil, including insurers and shipowners, responsible for making sure their cargo is not sold above the cap.
The U.S. Treasury, which has pushed for the measure for months, says the price cap will “sharply” reduce Russian revenue.
But some energy experts have raised questions about whether it will work as planned. Russia may decide to keep its oil off the market rather than selling at the cap price, further curtailing supply. And even if Russia continues to sell, a cap will only be effective if there is buy-in from every customer, including India and China, experts said.
But as “global oil prices will increase with this OPEC Plus decision, some countries might have greater incentive to go for discounted Russian crude,” wrote Tagliapietra. It is possible that the OPEC Plus news will make Beijing and Delhi less likely to abide by the price cap.
In the medium-term, those setbacks could test Europe’s resolve to support Ukraine. The planned cut to oil production “shows that the energy crisis in Europe is threatening to escalate into a global price war,” German business paper Handelsblatt warned in an analysis, arguing that the move pits Europe and the United States against OPEC, its partners, and large oil importers like China and India.
For President Biden and European leaders who flew to Saudi Arabia this year in extraordinary efforts to press for more oil production, Wednesday’s OPEC Plus rebuke has also prompted uncomfortable questions about the diplomatic trade-offs they were willing to make — and the results they have to show for it.
Biden visited Saudi leaders on a trip to Jiddah this summer and fist-bumped Crown Prince Mohammed bin Salman, while French President Emmanuel Macron later had a long handshake with Mohammed in Paris. In Greece, a top government member expressed public admiration for the crown prince’s “leadership” and “vision.” And German Chancellor Olaf Scholz visited the kingdom only days ago.
Saudi crown prince engages in long handshake with Macron on rehabilitation tour
Four years after the killing of journalist Jamal Khashoggi, the Western outreach appears to have largely rehabilitated the crown prince.
But for Europe and the United States, the efforts have “remained fruitless,” according to Germany’s Handelsblatt.
“As of today, it is clear to insiders: Saudi Arabia is on the side of Kremlin leader Vladimir Putin,” the paper wrote.
Rauhala reported from Brussels. Jeff Stein, Rachel Lerman and John Hudson contributed to this report.