Geopolitical Monitoring Report | October 7, 2022

Global

OPEC+ Announces Production Cuts Despite Biden Opposition

Background:

The OPEC+ Group – which includes members of OPEC and other oil exporting countries, such as Russia – announced they would be cutting oil production by 2 million barrels a day. The cuts to production will primarily be borne by Russia and Saudi Arabia. Russia has relied on high oil prices to undermine Western sanctions levied on Moscow following the invasion of Ukraine and likely pushed for the cuts to undermine the recently agreed upon price cap on Russian oil that the EU is set to impose; Saudi Arabia’s cut production for a myriad of reasons, which range from domestic economic concerns to a desire to “stabilize” international oil markets. 

The announcement was denounced by the Biden Administration, which announced an additional 10 million barrels will be released from the US Strategic Petroleum Reserve in response to the decision. US Secretary of State Antony Blinken stated that the State Department is also reviewing other “response options” to Saudi Arabia’s decision in consultation with Congress. While Blinken was not specific as to what actions the US would take in response, these range from cutting military assistance to the Kingdom to passing the NOPEC Act, which would expose OPEC and other similar oil cartels to lawsuits for price fixing.

The Biden Administration previously opposed the NOPEC Act when it was passed by the Senate Judiciary Committee in May, but the administration may drop their opposition to the measure in light of the OPEC+ decision to cut production.

Impact:

The decision will result in a rise in oil prices to around $100 a barrel, which – in the short term – will likely accomplish Russia’s goal of undermining the EU price cap and allow Saudi Arabia to stabilize its budget. However, rising energy prices amid a highly inflationary environment could trigger a global recession, which would in turn may cause a decline in oil prices and ultimately result in this decision backfiring on both countries. 

The long term impacts of a US response against Saudi Arabia could have a significant impact on the security environment in the region. If the US moves to cut military aid to Saudi Arabia, it could have significant impacts on the conflict in Yemen and the region in general. 

Instability of the Middle East naturally would result in higher oil prices. This may result in the US electing to enact economic sanctions on Riyadh. Globally, if the production worsens the energy crisis and prompts a recession, the economic downturn would result in broader global instability that could impact companies and organizations operating in economically unstable countries.

Mitigation:

Companies and organizations should prepare for higher energy prices as a result of the OPEC+ decision to cut production and factor these higher costs into their short-term budgets. In addition, a broad global economic recession – where energy prices could potentially remain high –  sparked by the OPEC+ decision is another potential risk they should factor into their decision making. 

The potential for instability in the Middle East – or companies that rely on shipping lanes that go through the region –  as a result of the US response should be a major concern if the US moves forward with its decision to cut military aid to Saudi Arabia. This extreme measure is not necessarily the most likely US response due to these concerns, but some type of response – which may come in the form of economic sanctions – is almost certain to occur. 

This could pose significant sanctions-related risks to companies that operate or do business in Saudi Arabia or rely on supply chains in the country. Organizations should be prepared to conduct exhaustive due diligence to ensure they remain in compliance with any potential sanctions that are levied on the country. 

Finally, economic downturns driven by energy price increases or shortages are likely to impact developing nations the most severely. This could be a catalyst for civil unrest, and organizations should ensure they have conducted adequate Threat Landscape Assessments for all facilities in countries where this may be a risk.

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