Rice U. energy experts available to discuss OPEC+ oil production cut

The Baker Institute for Public Policy

HOUSTON – (April 3, 2023) – Saudi Arabia and other OPEC+ oil producers have announced production cuts that will result in rising gas prices and continued friction in U.S.-Saudi relations, according to experts from Rice University’s Baker Institute for Public Policy.

“Today crude oil is up about $5 per barrel — that’s equivalent to a bit more than 10 cents per gallon at the pump if sustained,” said Mark Finley, fellow in global oil markets at the Baker Institute’s Center for Energy Studies. “Some analysts think crude prices could go to $100 later this year; that’d be equivalent to adding about 50 cents per gallon.

“Some speculate that a recent U.S. decision not to move quickly to refill the country’s strategic stockpile — despite an earlier promise to help support prices by doing so — may have upset OPEC+ leaders, especially within the broader context of strained relations between the U.S. and key producers including Saudi Arabia and Russia,” he continued.

Jim Krane, energy research fellow at the Baker Institute’s Center for Energy Studies, argues that the unexpected output cut follows a pattern.

“The Saudi oil market strategy since President Biden took office has been consistently less predictable and less favorable to U.S. interests,” he said. “Sunday’s cut extends this pattern of ‘Saudi first’ actions. We know the Saudi leadership was the driving force for the production cut in October, just weeks before the U.S. midterm elections. Saudi oil officials have been adamant that the October cut was based on market fundamentals, and not aimed at helping Biden’s opponents in the November election.

“Unfortunately, this means Americans are exposed to greater oil market risk because the Strategic Petroleum Reserve (SPR) remains underfilled,” Krane continued. “The SPR is one of President Biden’s few sources of ‘dry powder’ in the event of another oil market crisis. By leaving it underfilled, the Biden administration has a weaker hand to deal with any looming shortages.”

Kristian Coates Ulrichsen, research fellow at the Baker Institute’s Center for the Middle East, explains that Saudi Crown Prince Mohammed bin Salman finds himself in a situation where Saudi Arabia needs higher oil prices to generate the revenues necessary to implement the large initiatives and projects associated with its Vision 2030 strategy.

“When Mohammed bin Salman launched Vision 2030 in April 2016, he asserted that he thought Saudi Arabia could live without oil by 2020. Vision 2030 has reached its halfway stage with less foreign investment than expected, meaning that the Saudis are having to fund more of the projects themselves,” Ulrichsen said. “This domestic interest takes precedence in Saudi decision-making over relationships with international partners and is likely to remain a point of friction in U.S.-Saudi relations for the foreseeable future, even without taking into account the Russian dimension.

“The leadership in Riyadh appears to have decided it needs oil prices within a higher band as the critical implementation phase of the giga-projects moves into gear,” he continued. “So much of Mohammed bin Salman's credibility is bound up with Vision 2030 and the giga-projects that failure or under delivery is not an option, so we may see more such moves from the Saudis in years to come and as 2030 looms closer into view.”