The announcement by OPEC and Russia of a significant supply cut totaling 1.6 million barrels per day has raised concerns for the Biden administration. Oil prices jumped $7 a barrel on the news, and fears of a resurgence of inflation, as well as continued deterioration of the dollar’s status as the world’s reserve currency, have emerged.
This comes as the administration has been draining the Strategic Petroleum Reserve, which is meant to act as an emergency buffer in the event of oil-supply cutoffs. The reserve has reduced by half since President Biden took office. It is currently at 371 million barrels, which is just over 18 days’ worth of oil at a time when national security concerns are growing.
It is believed that the administration has been draining the reserve to keep oil prices low enough to salvage the midterm elections for the Democrats. The White House had promised to stop the drawdowns immediately after the elections, but they decided to keep draining the reserve two weeks ago. This decision has led Saudi Arabia to consider cuts, leading OPEC+ to replace Mr. Biden’s broken promise with a deal to impose their own floor on oil prices by slashing production.
The production cuts will, all else being equal, lead to higher prices for gasoline, heating fuel, factories, delivery trucks, electric bills, and groceries. The move by OPEC+ complicates the Federal Reserve’s task of negotiating down inflation while trying to stamp out banking problems caused, ultimately, by Washington’s unwillingness to rein in federal spending.
Additionally, Saudi Arabia’s move, coming just days after it announced it is joining the China-led Shanghai Cooperation Organization, raises fears of a fundamental erosion in the tacit bargain between the United States and the Gulf states, whereby the U.S. provided security in return for the continued use of the U.S. dollar for oil trade. If this decades-long relationship is under threat, it carries wider implications for America’s ability to sustain influence on the world stage.
The Biden administration’s strategy of strangling domestic production has led to the decline of production by a third compared with the Trump-era trend — about 4 million barrels a day. This decline has led Republicans to introduce legislation to reverse this decline and replace more OPEC oil with domestic production.
In conclusion, OPEC+ cuts have raised fears of inflation and the erosion of the dollar’s status as the world’s reserve currency. The move by the Biden administration to drain the Strategic Petroleum Reserve, coupled with its strategy of strangling domestic production, has led to these concerns. The move by OPEC+ will lead to higher prices for gasoline, heating fuel, factories, delivery trucks, electric bills, and groceries. It remains to be seen what the wider implications will be for America’s ability to sustain influence on the world stage.