4 min read.Updated: 05 May 2022, 07:13 PM ISTBenoit Faucon, The Wall Street Journal
Saudi Arabia and other oil exporters are among the biggest winners from the global commodities shock triggered by the Ukraine war
OPEC and its allies stuck to a small, planned increase in oil production on Thursday, as windfall revenue from high crude prices boosts the economies of Saudi Arabia and other producers while providing a buffer to Russia against Western sanctions.
In its third meeting since Russia invaded Ukraine, sending oil prices above $100 a barrel for the first time in eight years, the Organization of the Petroleum Exporting Countries and a coalition of Moscow-led oil producers said they agreed to continue raising their collective production by 432,000 barrels a day.
The incremental boost for June is in line with what the cartel, called OPEC+, agreed to last year as part of a plan to raise output to prepandemic levels. It comes despite repeated calls in recent months from the U.S. and other major oil-consuming nations for Saudi Arabia and other OPEC+ members to tap into the group’s millions of barrels of remaining capacity to pump more oil to help tame prices.
In afternoon trading in London, Brent crude, the international benchmark, was up 1% at $111 a barrel, while U.S. crude was 0.8% higher at $108.70.
A proposed European embargo on Russian crude imports within six months could reduce global oil supplies and send prices higher, analysts say. Russian crude production has already fallen since the invasion of Ukraine in response to reduced demand overseas and in the domestic market.
In a speech to the group’s delegates at a technical gathering ahead of Thursday’s meeting, OPEC Secretary-General Mohammed Barkindo said the “potential loss [of Russian oil], through either sanctions or voluntary actions, is clearly rippling through energy markets." But he noted this “cannot be made up from elsewhere. The spare capacity just does not exist," adding that a resurgent Covid-19 pandemic in China should inspire caution.
Most OPEC+ members are already pumping at their maximum capacity, while Saudi Arabia and the United Arab Emirates—which have so-called spare capacity to raise their production—say beefing up output would actually raise prices, not lower them.
High oil prices have resulted in tens of billions of dollars of additional revenue for many OPEC+ members, providing a vital boost to their economies after years of slow growth due to relatively low prices, some OPEC delegates and analysts say.
“The Saudis and other oil producers benefit too much to take any chance and change the status quo in the short term," said Adel Hamaizia, a visiting fellow at the Center for Middle Eastern Studies at Harvard University and a former economic adviser to the kingdom.
The International Monetary Fund in a report last week estimated oil exporters in the Middle East and North Africa would receive $320 billion this year more than expected due to high oil prices. The economies of the region’s core Arab oil producers are set to expand the most of any major economic region in the world this year, its data shows.
Saudi Arabia—OPEC’s biggest oil exporter and the group’s de-facto leader—registered its fastest growth in a decade during the first quarter, with its gross domestic product expanding 9.6% from a year earlier, according to the Saudi statistics authority. With oil production expected to increase further and the strong likelihood of looser fiscal policy, London-based consulting firm Capital Economics estimates the kingdom’s economy will grow around 10% this year. That is far stronger than the 6.3% growth currently expected by the consensus, it said.
Saudi Arabia and the U.A.E. are also spending to expand their influence in countries badly hit by the food-commodity crisis. Riyadh has agreed to a $8 billion bailout package for Pakistan, long courted by rival Iran; Abu Dhabi is shoring up the economy of Egypt, where it fears a resurgent Muslim Brotherhood, with a $2 billion cash injection to support its economy.
Elevated oil prices are also expected to help buffer the shock of Ukraine-related sanctions for Russia. Russia’s production fell by 367,000 barrels a day below its OPEC+ quota in April, according to data-intelligence company Kpler. Analysts say the proposed European Union ban on imports of Russian crude could reduce Moscow’s oil sales because not every barrel of Russian oil that once landed in Europe will be rerouted to buyers in other markets.
Meanwhile, some other oil-producing states like Iraq and Algeria are set to reallocate a part of the extra cash they are making to deal with food inflation and ease chronic social tensions.
Baghdad says rising prices generated its highest oil revenue since 1972 in March, when it made $11 billion in a month. The IMF expects Iraq to be the fastest-growing oil economy in the region at 9.6% this year. But it is also facing an inflation rate of 6.9% in 2022, the fund says, in part driven by food prices. To mitigate living costs, Iraq’s government has proposed a law authorizing the spending of $20 billion, including for the purchase of at least six months’ worth of wheat and covering debts of farmers hit by rising fertilizer costs.
In Algeria, where chronic joblessness and a stagnant economy contributed to a popular uprising three years ago, the government is using the extra cash to ease tensions at home. In March, Algiers increased public pensions by up to 10%, and introduced new unemployment benefits of about $90 to more than half a million unemployed.
Oil prices have surged in recent months, fueling inflation around the world, in part because several OPEC+ members have been unable to meet their share of production as global demand has picked up.
While some members worry that elevated prices might eventually hurt demand in some key markets already struggling with high inflation, other delegates have said the surge in prices is being driven by panic and not demand-supply fundamentals, which would mean any additional supply wouldn’t change much.