The Impact of the September 16 Saudi-Russian OPEC Cut on Oil Prices and Inflation in the Era of Middle-Term Elections

David A. Andelman is a contributor to CNN and author of “A Redline in the Sand: Diplomacy, Strategy, and the History of Wars That Might Still Happen.” He formerly was a correspondent for The New York Times and CBS News in Europe and Asia. His views are not reflected in this commentary. View more opinion at CNN.

President Joe Biden and Saudi Crown Prince Mohammed bin Salman fist bump upon Biden’s arrival at Al Salman Palace, in Jeddah, Saudi Arabia, on July 15.

The announcement this week of a 2 million barrels per day cut in production from Saudi Arabia and Russia triggered a cascade of toxic shifts.

The EU wants to impose a price cap on Russian crude oil for its 27 member nations. If the price of Russian oil exceeds the EU limit, any shipping line that transports Russian crude would be barred from insurance their cargo, and the ships would not be allowed to sail.

Energy markets have been on a roller-coaster ride this year. In response to Russia’s invasion of Ukraine, Western countries imposed financial sanctions on Russia and embargoed its oil exports. Russia cut its gas supplies to Europe in retaliation. Major importers such as Germany had to slash their energy use and look elsewhere for supplies. Low- and middle-income nations struggled to access affordable energy. Pakistan, Bangladesh, and Sri Lanka had fuel price hikes, which spilled over into food markets.

For now, the most immediate fallout will be on oil prices and revenues. Designed to spur a reversal of the trend that has sent oil prices plummeting to $80 a barrel from just over $130 a barrel in March, the impact on prices at the gas pump and on inflation in the United States on the eve of mid-term elections is already being felt.

Oil monitor Platts pegged the crude price at $93.73 a barrel on October 4, up 11% from $84.63 on September 26, when rumors of an OPEC cut first began circulating. But that is still lower than the peak of $132.06 a barrel on June 14.

The analysts at Morgan Stanley hiked their estimates for the price of oil after the announcement. Any such reversal will inevitably have an impact on gas prices and inflation.

With OPEC cutting output across the board, that could increase the pain to European customers even further, since oil prices from other oil-producing nations could rise dramatically with supply cutbacks.

Simultaneously, the US has begun looking even more attentively to other sources of supply for crude to make up for the OPEC shortfall. The Wall Street Journal reported that the Biden administration could be prepared to scale down sanctions on Venezuela and allow Chevron to begin exporting again from the country to the US with political conditions, if President Nicols Maduro opens talks with opposition leaders.

It will have little impact on the immediate situation but could be part of a larger pattern of shifting oil imports away from Russia. Indeed at its height in the 1970s, Venezuela was producing 3.8 million barrels per day, according to Forbes. In August this year, that figure was down to 723,000 barrels, according to the Warsaw Institute.

European countries have been reducing their dependence on Russian gas since the beginning of the year. (In early September Russia cut off gas supplies to Europe through the Nord Stream 1 pipeline indefinitely, citing an oil leak).

Already, countries like Germany, France and the United Kingdom are either restarting or considering a return to coal plants – one of the most polluting fuels – to help plug gas shortages. OPEC cutbacks and price increases could only accelerate this environmentally dangerous trend.

Can sanctions work or will they dodge their own solutions? The role of Saudi Arabia in aerospace and defense policy and how Russian influenced the future of the Cold War

Furthermore, there is growing sentiment in Congress to reevaluate America’s wider relationship with Saudi Arabia and especially the vast arms sales to the kingdom.

Rep. Ro Khanna went further, telling CNN he wants the Biden administration to halt all sales of aviation parts – and to prevent Raytheon and Boeing from making Saudi sales. Both provide weapons to Saudi Arabia.

The removal of US troops and missile defense systems from Saudi Arabia will be the subject of a new legislation, which will be introduced this week by Rep. Tom Malinowski. It is a lot more difficult for Republicans to vote no when the language comes straight from the GOP-sponsored bill in 2020.

Russia is able to shift oil and gas exports to Asia. Russia can deliver oil by ship. Gas requires pipelines. The Power of Siberia 2 could be delayed by Russia’s sanctions, but it would extend the natural gas connection between Russia and China. The degree to which infrastructural, administrative and economic delays may affect Russian exports to China needs to be considered by researchers. Will sanctions work or will Russia make their own solutions to dodge them?

Technological and Economic Challenges of Green Hydrogen: Recent Progress on Energy Solutions and Implications for the Future of the EU and the Middle East

Other energy solutions are also getting a boost, notably green hydrogen — obtained from water using electrolysis powered by renewable energy. For instance, the Canada–Germany Hydrogen Alliance, announced in August, is aligning policies and investments to develop hydrogen supply chains between the two countries. The EU is refocusing its energy trade ties with African nations, including Algeria, Nigeria and Namibia, towards green hydrogen and ‘power-to-X’ technologies, which use clean electricity to make synthetic natural gas, liquid fuels or chemicals that are carbon neutral.

New energy projects must be investigated in regards to technological and economic viability. Some have been quickly proposed or changed. Natural gas and green hydrogen can be piped through an underwater network between Barcelona and Marseilles in the next few years, thanks to the BarMar Pipeline, a joint project by France, Spain and Portugal. The viability of the infrastructure still needs to be established.

It is important to know the extent to which countries can fast- track the switch to green energy. High global oil and gas prices (see ‘Energy cost hikes’; upper panel) offer an incentive for households and businesses to install solar panels and heat pumps to lower their energy bills, as many did this year in Europe. EU policymakers fast-tracked permits for installing renewables, and simplified regulations around retrofitting buildings to be more energy efficient. The Inflation Reduction Act of the United States should make it easier for clean technologies to be produced domestically. Researchers need to see how these policy shifts pan out amid strengthening economic and political headwinds.

Western countries are ramping up domestic manufacturing of green technologies to be less reliant on China, a geopolitical competitor. Russia’s war has amplified growing unease about China’s leading position in clean technologies and its control over key raw materials used in them, such as rare earth minerals. This year, the United States passed the CHIPS for America Act to strengthen its domestic semiconductor industry, which is central to all electronic products. The nation has also banned imports from China’s Xinjiang region — a manufacturing powerhouse for solar panels — in response to reports of forced labour there.

Countries with reserves of key metals and minerals such as cobalt and lithium also need attention. Resource wealth can cause conflict as the Middle East has seen for oil. Exports in foreign currency can depress the domestic economy, as has happened in Nigeria and Venezuela. Researchers need to assess the economic and social impacts of such ‘green extractivism’ in low- and middle-income nations.

Research needs to be done into the design of the global loss and damage fund to compensate countries for the effects of climate change. What form the fund should take, what types of activity it should support and how it can be funded by rich nations all need to be decided. Otherwise, tensions between nations will grow and risk stalling climate talks — losing time we do not have.

High costs and limited supplies of energy will reorganize industries, including processes and locations. Decarbonization is being brought forward by years as structural changes occur and the effects are already being felt.

Researchers need to inform new business models to help heavy industry to adjust swiftly while remaining competitive. As practices and conditions change, these models need to be refreshed quickly. If they switch to low-carbon liquid fuels they will be able to sell them, which will keep the refinery alive in the long run. How can costs come down, and what sort of public support might help to bring viable clean products to market quickly?

Little is known about future supply chains for green technologies. The production and transportation costs of green hydrogen need to be worked out. Ammonia is a promising way to transport such fuel over long distances, but the commercial prospects of this remain in question.

There will be clarity about economic nationalism and trends in globalization in the coming year. Some economists predict that reshoring will slow the global energy transition as markets fragment. Researchers also need to watch what happens to the global division of labour that drove the development of clean technologies and slashed the cost of solar panels in the first place — a blend of innovation in the United States, Chinese investments in manufacturing and subsidies in Europe. If countries act in isolation and do so purely competitively, this virtuous circle might break.

The energy crisis is exacerbating social inequality within and between countries. Vulnerable households and low- and middle-income nations have been hit hardest by energy cost hikes. There are repercussions that are deep. The energy crisis might yet spill over into a fiscal or debt crisis — the debt burden of developing countries has reached a 50-year high in the wake of the COVID-19 pandemic (see go.nature.com/3hnrcky). The industries of vulnerable economies are likely to contract. Spiralling state support for ailing sectors empties public pockets and dwindles foreign exchange reserves, with the risk of increasing risk ratings for financial borrowing.

Researchers must evaluate the implications for national policies and multilateral aid, lending and development policies. They should shed light on the extent to which increasing energy poverty, energy price shocks and energy-induced inflation weaken social cohesion and threaten political stability. The United Kingdom and the Czech Republic have seen protests that have affected rich nations.