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OPEC+ last weekend cut oil production by 1.65 million barrels per day. Saudi Arabia and Russia are each taking 500,000 barrels, and beyond that, it is mainly Iraq, Emirates, and Kuwait that are cutting production. This reduction is different from last October's 2 million barrel reduction, which was mainly a recognition of the reality that less was being produced anyway. Also, Russia's additional reduction now of 500,000 barrels per day has already been achieved in recent months. Because of sanctions and production problems, Russia is already at that level. But the other countries are now going straight against the wishes of the U.S. government. The latter is actually demanding more oil production as part of the war in Ukraine. For a long time, the Americans even drew on the Strategic Petroleum Reserve to keep the price of oil down. After all, demand was greater than production; only by using these reserves could the market be balanced. This year there is more demand from China while supply from Russia is falling. Setbacks include lower demand for energy in Europe and the United States. Furthermore, supply outside OPEC+ rose somewhat more than expected, despite continued underinvestment there. On balance, there will be a small deficit in the second half of the year, allowing oil prices to rise toward $90 a barrel.
The Russians' reduction is not voluntary. Sanctions for the war and the departure of some Western oil companies have prevented the country from maintaining production. Each Siberian winter is a severe drain on Russian oil production, something that must be kept afloat in part with Western technology. More importantly, this reduction cannot be separated from Xi Jinping's recent visit to Saudi Arabia and subsequent visit to Russia. That coupled with the fact that this is not an OPEC-wide decision, but a deal between Russia and Saudi Arabia followed by other OPEC members. This decision widens the gap between OPEC+ and the Western world, but there is an obvious rapprochement with China. China is currently buying a lot of oil from the Russians. Oil is also 30 percent cheaper. Furthermore, Saudi Arabia and China will jointly build a new $12.2 billion oil refinery and invest $3.6 billion in a Chinese refinery. The country will also become a member of the Shanghai Cooperation Council. A little longer and China will also become a member of OPEC+.
China also ensured the rapprochement between Iran and Saudi Arabia last month, meaning that virtually all alliances in the Middle East are rapidly dissolving. In the Middle East, the enemy of your enemy is your friend, but suddenly there is peace. For example, recently Bashar Assad of Syria went to visit Qatar, the same country that until recently supported the Syrian rebels with billions. Now that that support is gone and Iran has also implicitly made peace with Saudi Arabia, peace may return to large parts of the Arab world. There is even high hope that the war in Yemen, which has already claimed 150,000 lives since 2014, will end in the foreseeable future. Saudi Arabia supports the Yemeni government and Iran supports the Houthi rebels. The price of oil has fallen recently due to these developments in the Middle East, although the banking crisis will also have played and role. So that peace dividend in the form of lower oil prices is short-lived. Many countries simply need higher oil revenues as well. Saudi Arabia may see it as compensation for the painful loss on Credit Suisse. In 2022, the country had a government budget surplus of 5.5 percent for the first time in eight years; little of that would remain after the recent drop in oil prices. The advantage of the OPEC cartel is that in theory, it can cut production by 10 percent to double revenue. History shows that every time the cartel gains market share, the price of oil goes up, and that is the case this time as well.
Since the 1970s, Saudi Arabia has been an ally of the United States. This alliance has also ensured that virtually all oil today is traded in dollars. Because some major oil states in the Middle East have pegged their currencies to the dollar, they are also referred to as petrodollars. That oil trade, along with the U.S. global military presence and, of course, Paul Volcker's intervention in 1982 has made the U.S. dollar the world's reserve currency. Now all those things are being questioned. Not all oil is traded in dollars anymore; an increasing amount goes in the renminbi these days. The Chinese and the Indians don't need to come to the Russians with dollars. They can't do anything with them in international payments anyway. But France also signed a renminbi LNG deal with China last month. If more European countries do that, we will need the renminbi to finance such deals. Until recently, we had the luxury of cheap energy from Russia, then getting all the euros back in the form of luxury yachts, investments in soccer clubs, luxury real estate in London, Paris, and the Côte d'Azur, and, of course, euros held on deposit on the assumption that the rule of law would also protect the Russians. That turned out to be an illusion. So now we have to buy energy in expensive dollars, but the renminbi is probably a much more attractive alternative given the flow of goods between China and Europe. China wants to because it wants to become less dependent on the dollar. Earlier this year, China agreed with Brazil that from now on they would not settle their mutual trade in dollars.
In part, the Americans have themselves to thank for tinkering with the dollar's reserve status. The United States has become a major oil producer again through fracking, among other things. Therefore, there is less need for a strong military presence in the Middle East. The Taiwan Strait is now the geopolitical center of the world, not the Persian Gulf. Furthermore, the monetary madness of recent years stands in stark contrast to the firm action of Paul Volcker in the early 1980s. There is every reason to doubt the status of the dollar. The main cause of this year's banking crisis is U.S. monetary policy. Now that the Americans have also used the dollar as a weapon against the Russians, the same may happen to the Arabs and the Chinese. That creates a bond. This is evidenced by the Middle East's joining the Sino-Russian bloc.
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