The oil market has taken yet another hit this month as Saudi Arabia deepened oil production cuts to gain further control of prices at a time U.S. officials are failing to boost the domestic Strategic Petroleum Reserve, and supplies are rapidly dwindling. The shock caused by lower global oil output is threatening to undermine U.S. energy stability and send prices at the pump soaring over the next few weeks and months. With the relationship between America and OPEC nations deteriorating, our geopolitical leverage is weakening, and the Saudis are seeing this situation as a perfect opportunity to strengthen their dominance in the global scenario.
Saudi Arabia and a handful of OPEC+ nations have been announcing significant cuts in their oil production this year. The Saudis and Russia, the world’s biggest oil exporters, deepened oil cuts earlier this month, sending prices higher for a third time this year. Saudi Arabia said it would extend its voluntary oil output cut while Russian Deputy Prime Minister Alexander Novak said Moscow would cut its oil exports by 500,000 barrels per day in August. Similarly, Algeria said it would cut oil output by an extra 20,000 barrels from Aug. 1-31. The coming cut will be on top of a 48,000 barrel reduction decided in April, it said. The move was swiftly followed by Libyan Oil Minister Mohamed Oun. In all, the coalition, which pumps around 40% of the world’s crude oil, already has in place cuts of 3.66 million barrels per day, amounting to 3.6% of global demand.
OPEC leaders continue to point to an uncertain demand outlook as the catalyst for their decision. Moreover, many officials in Riyadh, the Saudi capital, were reportedly frustrated that U.S. Energy Secretary Jennifer Granholm recently said that it would be “difficult” for the United States to refill its Strategic Petroleum Reserve this year. In January, the administration said it would boost its domestic reserves when oil dropped below around $70 a barrel, as it did for a brief period after the failure of Silicon Valley Bank. However, that opportunity was missed, and now U.S. supplies are rapidly shrinking.
The combination of a recession, the crisis in the banking sector and the reopening of the Chinese economy is making most analysts project a significant decline in global oil supply this year and next, after many decades of underinvestment to build new capacity. The latest production cut means that a tighter market and higher oil prices will arrive sooner than previously expected. That may be a disastrous scenario for America, but for the Saudis, spiking oil prices could more than compensate for lower sales, boosting OPEC revenues.
The price of oil on global markets is a major driver of gasoline prices in America, so as the price of oil goes up, gasoline prices will follow, and we should start bracing for a repeat of what happened last year when oil prices surged, sending the national average price for gasoline to a record of as much as $5 per gallon. This summer, prices remained at the $3.50 average per gallon, bringing some relief to Americans after several months of rising inflation. But these lower costs didn’t come as a result of higher inventories. Instead, they were caused by political decisions amid the growing disapproval of the administration in recent polls.
Our national reserves have been depleted, and higher oil prices will make it even harder for us to rebuild domestic inventories. While other economic superpowers have become more independent, now more than ever, the U.S. is relying on other nations for resources, and that will come at a very expensive price for all of us.
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