25 September 2023

Is the West in a cold war with Opec?

By Damien Phillips

The war in Ukraine has thrown Europe’s security situation into stark relief. Vladimir Putin’s decision to launch a full-scale invasion has seen the spectre of conventional war, which many thought banished with the fall of the Soviet Union, return to haunt the continent.

But whilst the hot war against the rickety Russian regime has naturally drawn the focus of western audiences and policymakers, it is arguably merely the by-product of the new cold war being waged against NATO by Opec: the Organisation of Petroleum Exporting Countries.

I know, this seems like a bold claim, especially since British politicians are so often criticised for cosying up to the unsavoury regimes at the heart of Opec, such as Mohammed Bin Salman’s in Saudi Arabia.

But a clear-eyed assessment of the Organisation’s conduct in recent decades makes it hard to dispute that they do not have the West’s best interests at heart – and once we accept this, the question becomes: what needs to be done?

First, consider how Opec has reacted to the war in Ukraine. Putin’s war economy is financed entirely by Russia’s oil exports: it is this cash he uses to buy ageing North Korean weapons, pay his Wagner mercenaries, and buy the quiescence of his people. That’s why the G7 this year imposed a price cap on Russian oil, which currently stands at $45 for most products.

Unfortunately, it hasn’t worked. Instead, Opec has repeatedly slashed production in order to push up prices; they have already climbed to over $90 per barrel, and Goldman Sachs estimates that they are on course to break $100 per barrel. 

This means that despite the relatively high cost of extracting Russian oil (estimated at either $20 a barrel or, according to a 2019 report by Saudi Aramco over $40 a barrel), Moscow is still able to export at a handsome profit; even when it has to sell at a discount to nations such as India and China, that is still from a base price which has been hugely inflated by Opec’s actions.

That doesn’t just mean more munitions to hurl at Ukrainian cities, but more pressure on European voters, whom Putin hopes will tire of the war and pressure their governments to cut aid to Kyiv. His hopes of a major test of NATO resolve last year were dashed by a relatively warm winter, but high energy prices are still biting, undermining manufacturing and feeding through into people’s fuel bills and petrol prices.

Opec insists that its actions are not about price fixing; in 2019, the Saudi energy minister insisted that its actions were to ‘reduce volatility’. But history doesn’t bear that out.

When Russia launched its invasion of Ukraine, global prices spiked to over $130 per barrel; Opec did not ramp up production to smooth that out. Yet when in March 2023 prices had finally normalised around $70 a barrel, the organisation coordinated a cut in production of 2m barrels a day, pushing prices up again. 

In 2020, when a slump in demand due to lockdowns offered many nations a reprieve from the economic toll of the pandemic, Opec once again slashed production (by 9m barrels a day) to push up prices, increasing the cost of the stimulus and fuelling the post-Covid inflationary spiral with which we are currently grappling.

Few things have a more serious impact on our economy than high oil prices. It not only pushes up food and fuel bills but also costs in almost every supply chain, from manufacturing to transport. Today’s prices are a major reason the public aren’t feeling the benefit from falling inflation.

Given Western nations’ enormous exposure to global oil markets, not to mention the huge amounts of global growth that could be unlocked by cheap energy, it’s remarkable that Britain, America, and our allies haven’t taken action sooner to raise and coordinate our own production.

Too often, local politicians (and, in fairness, voters) prefer to pander to the green lobby by hindering or even blocking outright any effort to make more and better use of our natural resources – even if this does nothing for the planet, as we still need the oil and gas regardless, and increases our dependence on unsavoury regimes.

Even so stark a call to arms as the war in Ukraine has not broken this mindset. Canada has so far failed to deliver the production increases it promised in the wake of the invasion, whilst Britain has not prevented purported allies in the Middle East, such as Bahrain and Oman, from rowing in behind Saudi-led initiatives to push up prices.

But there is much that could be done. Opec is a fractious alliance, and the larger grouping Opec+ even more so. Conflict with Riyadh has already seen Qatar break with its neighbours and strike several important Liquified Natural Gas deals with the West; Algeria has also not allowed its membership to stop it signing a separate pipeline agreement with Italy.

Western diplomats should be actively engaged in trying to identify and exploit any divisions between oil-producing countries, and western governments ready and willing to offer attractive terms to any which might be prepared to deal.

We could also make much better use of our own reserves; it’s absurd that democratic nations have totally ceded the initiative to the autocracies when some of the biggest energy-producing nations in the world, such as the United States, Canada, Australia, and Norway, are in our camp.

Democratic governments obviously have less freedom of manoeuvre than dictators and absolute monarchs. But with sufficient political will, we could surely negotiate with the oil companies to create extra capacity, which could be brought online in time of crisis, or develop strategic petroleum reserves which could be released to smooth out any spike in global prices.

Given energy’s central role in modern geopolitics and security, we could perhaps go so far as to formally organise an ‘energy NATO’, either by adding an energy dimension to the existing treaty or setting up a new grouping of democratic and allied oil and gas exporters.

Whatever answer we choose, we cannot afford to do nothing. The war in Ukraine is a foretaste of what promises to be a dangerous 21st Century, and has starkly exposed the shortcomings of the complacent, end-of-history mindset of the past 20 years. If we don’t take that lesson now, we will surely repent at leisure in decades to come.

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Damien Phillips is a Fellow of The Cobden Centre, and a specialist in international affairs and political economy.

Columns are the author's own opinion and do not necessarily reflect the views of CapX