The new OPEC+ energy policy towards the West: a cooperation or a coercive tool?

DI MARGHERITA CESERANI

22/11/2022

The latest OPEC and non-OPEC Ministerial Meeting was held at the beginning of October and a new direction in the international energy policy has been implemented by countries among which Saudi Arabia. In fact, the proposal to cut oil production by 2 million barrels per day passed, meaning for Washington and the Western countries that they will have to seriously consider OPEC+’s leverage in the future.

In the weeks preceding the American Midterm elections, the U.S. administration has intensively worked to put pressure on the OPEC+ coalition and gain time over the oil production cut. Indeed, Biden and his staff feared that such a move could result in a favourable atmosphere for the Republican counterpart. A comparison between today’s energy crisis and the 1970s oil crises comes natural to most, is the West facing new tensions with the Middle East?


The 70s oil crises

The first time oil supply was employed as a strategic tool in the geopolitical game dates back to 1973, when the Arab countries called an embargo and suspended exports to the West in reaction to their support to Israel in the Yom Kippur War. Being the industrialised American and West European sectors mainly reliant on oil, such move prompted them to reconsider dependency on this kind of natural resource. Moreover, the need to look for alternative producers was linked to the aim of reducing further economic implications amidst the Cold War.

Another energy crisis coincided five years later with the outbreak of the Iranian Revolution. The Iranian bottleneck was quickly compensated by other OPEC countries, which covered the global demand by increasing their manufacturing output. However, barrel prices experienced a significant increase up in the market to an average of 98$. The Western attempts to sign new contracts in a short time tipped the trading scales in OPEC’s favour.

The historical background tells us that energy can be well played out as a constraining device in the international arena when countries are interest-driven. Are the Middle East and partners employing international energy issues as a coercive tool today?


OPEC energy policy in 2022

On the one hand the escalation of the conflict in Ukraine has shown the European Achilles heel and pushed the EU governments to target a diversification policy, on the other it has handed an extremely promising leverage to the Middle Eastern region. Not by chance has the American administration requested closer cooperation since the beginning of the year, but OPEC+ states have well understood the market power they could hold.

By initially refusing to answer the U.S. claim to reduce the European dependency on Russian imports, they showed to have a strong say in the matter and it is evident that they are not willing to submit to externally dictated policies. Discontent could stem from the progressively less committed American status as guarantor in the region – for instance regards the Iranian nuclear issue which concerns the area. Rather, Saudi Arabia, the UAE, and neighbours seem to exert an active position in global affairs, for example their latest decisions at the OPEC and non-OPEC Ministerial Meeting were said to influence the U.S. midterms. In the end, Biden failed to obtain the postponement of the production cut, and even if elections were not much affected by this energy policy, it still marks a major blow for the U.S.

The European governments have focused their efforts on achieving compensation contracts of their own as well. Germany, whose oil stocks were one of the most tied to Russia, has ultimately signed an LNG-deal with Qatar and inaugurated its first dedicated terminal. Italy approached Algeria with a new gas agreement, whereas for France the key energy partner is the UAE. However, attention should be focused on high energy prices and their leverage in the hands of the eastern region to control the energy transition, attracting new investments in the sector for production expansions.


Conclusions

Despite the European goal of ecological transition, the demand for energy-intensive raw materials such as gas and oil is still high and will be crucial until this policy is finalised. Therefore, there will continue to be dependency on natural resource suppliers. OPEC+ states are at a crossroads in deciding whether to act cooperative or coercive with the West.

They have ultimately built strong ties with China and have started hypothesising to switch to the yuan to pay for future transactions. Also, the production cut should be read in favour of Russia, inferring that OPEC+ lean towards the second option. Anyway, it is also true that Western dependency is limited, as Middle Eastern countries are minor suppliers in the European market. Moreover, the frequent instability in the region prevents the West from investing in the development of infrastructures such as pipelines in the area.

A tightening of relations with the West is thus expected, either caused by the European green policy (which has been slowed down, but will still be implemented by 2030) or by the aggressive monetisation of OPEC+, whose prices could reach a tipping point and bring to demand destruction and a global recession.

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