Putin just got a big boost in his economic war with the West

During his presidential campaign Joe Biden pledged to make Saudi Arabia an international pariah. Then came sky-high inflation and a war. In July, Biden swallowed his words and travelled to Jeddah to meet Crown Prince Mohammad bin Salman.

But if Biden had hoped that MBS, as the Kingdom’s ruler is known, would boost oil output at a time when higher crude costs were driving a surge in inflation, he was to be disappointed.

Saudi Arabia’s Crown Prince Mohammed bin Salman and Russian President Vladimir Putin.Credit: AP

Instead, in October, the Saudi-led OPEC cartel of oil producing countries slashed output by two million barrels per day to drive prices higher. Now – heedless of an angry US president who has threatened unspecified “consequences” – it is cutting production again.

As Biden looks on powerlessly, one of the biggest winners is likely to be Vladimir Putin.

On Sunday, nine members of OPEC + (a larger collective of 23 nations) announced a voluntary output cut of 1.2 million barrels per day from May until the end of the year. This amounts to 1.1 per cent of global supply.

The move drove up oil prices immediately – and they will continue to rise. Brent crude oil jumped around 6 per cent to over $US85 per barrel. Goldman Sachs has raised its forecasts for Brent crude for December 2023 up from $US90 to $US95. By December 2024, prices will have climbed to $US100.

These prices will be the new normal, says Bjarne Schieldrop, chief commodity analyst at SEB financial services. And it will translate into pain for millions of consumers through higher prices at the pump and greater costs in the shops. The blow to the West is threefold. High oil prices will keep inflation up. The move signals that Saudi Arabia is turning its back on the West and turning to China. Rising oil prices will also undermine sanctions on Russia – where oil profits are about to surge.

Every $US1 increase in the price of crude oil boosts Russian export revenues by about $US2.7 billion a year, says Benjamin Hilgenstock, author of a report on Russian sanctions for the Centre for Economic Policy Research, a think tank.

A $US10 increase in the oil price will therefore increase Russian oil export revenues by around $US27 billion to $US145 billion this year. This is about 22.5 per cent more than CEPR had forecast before the OPEC decision.

Western sanctions on Russian oil came late. The EU only introduced an embargo on crude in December 2022 and on oil products in February 2023. For the majority of last year, Russia benefited from high oil prices and its current account surplus hit a record high, says Hilgenstock. Revenues were just starting to come under pressure – until the boost from OPEC.

“This is Saudi Arabia saying, ‘Hey, Russia – you’re our friend.’ What they are doing here is siding with Russia and the Chinese alliance,” says Schieldrop.

“After the cuts from OPEC, we are going to have a tighter market. Russia is going to be able to charge a higher oil price, get better income, and be more easily able to finance the war in Ukraine, which will indirectly counter the sanctions the West has implemented.”

The move is natural for Saudi Arabia because the majority of the future demand for its oil will come from Asia.

Other nations can purchase from Russia as long as the crude price is below a cap – this is necessary if they want to use shipping and transportation services from countries in the OECD club of rich nations and the EU. But countries such as China have no restrictions if they do not need to rely on these services.

Rising oil prices will help boost Russia’s coffers. Credit: AP

Russian oil exports to China, India and Turkey have jumped since the war began. Overall exports in December 2022 were higher than in December 2021, according to CEPR.

Just as Russia rakes in cash, the West will be creaking under the burden of inflation.

“It is like a tax on the global economy. It works the same way as rate hikes – it has a slowing effect,” says Schieldrop.

Headline inflation is unlikely to rise, if only because oil prices were so high last year, but the OPEC cut means prices will stay higher for longer.

“It highlights the OPEC willingness and ability to control prices. That means that if we have an economic downturn, where some of the weakness could have been alleviated from lower input prices, that will not materialise,” says Ole Hansen, head of Commodity Strategy at Saxo Bank.

Prices will rise in particular markets that rely on oil. “When it comes to sectoral sensitivity, transportation will certainly be the first under attack,” says Tamara Basic Vasilijev, senior economist at Oxford Economics.

The cost of operating farm machinery will also go up, bringing further pressure on food prices, says Hansen.

“We have seen soybeans and corn prices rise since Friday,” he says.

The move is a major power play from Saudi Arabia, which has announced cuts just after America said it would not boost global demand by replenishing its strategic stocks this year.

“This is Saudi Arabia saying, ‘Hey, Russia – you’re our friend.’ What they are doing here is siding with Russia and the Chinese alliance.”

America and Saudi Arabia have historically had strong links. Saudi Arabia is America’s largest foreign military sales customer. But relations peaked when Donald Trump was president, says James Swanston, Middle East and North Africa economist at Capital Economics. Trump took a strong line on Iran. Relations under President Joe Biden, who campaigned with anti-Saudi stance, have deteriorated.

“One thing almost on a personal level was that the Crown Prince Mohammed bin Salman has taken some offence to the fact that President Biden always wanted to talk with King Salman himself, rather than MBS,” says Swanston.

The OPEC move takes advantage of the fact that US shale production is nearing a peak, following a long period in which fracking in the country drove prices down.

“Slowing growth in US shale oil since early December 2022 is basically a whole free card for OPEC plus.”

Telegraph, London

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