Saudi Minister of Energy

Saudi Arabia's energy minister famously stated that the kingdom "enjoys keeping everyone on their toes."

That is likely how White House officials and Democratic politicians felt when Saudi Arabia led OPEC to announce a massive cut in oil production this week, sparking fears of even higher inflation just five weeks before the midterm elections.

On Wednesday, OPEC+, the oil cartel led by Saudi Arabia and Russia, agreed to cut output by 2 million barrels per day, which is twice as much as analysts predicted, in the largest cut since the Covid-19 pandemic. The US's intense pressure campaign to persuade its Arab allies not to cut ahead of the decision appeared to fall on deaf ears. Russia is already pumping below its OPEC+ limit, and the majority of the cuts will come from Gulf producers.

Saudi officials insist that the kingdom must prioritize its own economic interests over domestic political considerations in the United States.

"We are concerned first and foremost with the interests of the Kingdom of Saudi Arabia," Energy Minister Prince Abdulaziz bin Salman al-Saud said in an interview with Saudi TV on Wednesday, adding that the government "wants to be a part of the global economy's growth."

Prince Abdulaziz said the cartel needed to be proactive as central banks in the West raised interest rates to combat inflation, raising the prospect of a global recession, which would reduce demand for oil and drive down prices.

"This appears to be a proactive measure to hopefully avoid a price crash that would necessitate a sudden cut as the US Federal Reserve continues to hike interest rates," said Ellen Wald, a nonresident senior fellow at the Atlantic Council think tank in Washington DC.

Because of its reliance on oil revenues, the Saudi economy has a history of succumbing to oil market boom and bust cycles, in which high prices bring in a flow of cash followed by downturns. According to experts, the kingdom is attempting to prepare for such an event.

"Saudi Arabia is attempting to avoid a repeat of 2008, when the market crash sent the global economy into a recession and oil prices suddenly plummeted, necessitating OPEC's emergency action," Wald said.

Analysts also believe that Saudi Arabia cannot afford to allow oil prices to fall below a certain level for fiscal reasons.

After eight years of deficits caused by low oil prices and the Covid-19 pandemic, the kingdom is expected to record its first budget surplus this year.

According to the International Monetary Fund, global oil prices must be around $79 per barrel for its budget to break even. Prices fell to $85 per barrel last month, from a high of $139 just seven months ago. That was a red flag for Saudi Arabia and other oil exporters who rely on oil for the majority of their revenue.

"But the Saudis want to ensure a steady stream of surpluses, not just balance the books," said Robert Mogielnicki, a senior scholar at the Arab Gulf States Institute in Washington, adding that the kingdom "would like to see prices moving closer to the high $90s."

Saudi Arabia has the world's lowest oil extraction cost, at around $3 per barrel. That means that the vast majority of the revenue generated by each barrel is retained by the company. Those funds are required to finance everything from futuristic trillion-dollar desert cities to a sizable government wage bill, despite recent tax increases and attempts to diversify the economy.

"The high price [needed to balance the budget] is due to large spending on government services, infrastructure investment, public sector, etc," said Omar Al-Ubaydli, director of research at the Bahrain-based Derasat think tank, adding that "conventional tax instruments, particularly personal income tax, are largely absent."

"It is attempting to have a diverse and stable revenue source for the government because unstable government finances are extremely disruptive to the economy," Al-Ubaydli added.

Still, Democrats have been outraged, framing Saudi Arabia's move as a hostile act against the US that benefits Russia by filling its coffers with petrodollars as it wages war on Ukraine.

"What Saudi Arabia did to help Putin continue his despicable, vicious war against Ukraine will be remembered by Americans for a long time," Democratic Senate Majority Leader Chuck Schumer tweeted on Friday.

The Biden administration reacted quickly. On Wednesday, White House press secretary Karine Jean-Pierre issued a statement saying that "it is clear OPEC+ is aligning with Russia." Secretary of State Antony Blinken stated on Thursday that the United States is "reviewing a number of responses" to Saudi Arabia's move, adding that the White House is "consulting closely with Congress." Some Saudis are calling the outpouring "hysterical."

The Biden administration may now back the bipartisan NOPEC bill, which would subject OPEC+ members to antitrust lawsuits by removing immunity from the cartel's national oil companies.

"The reaction from Washington policy circles is exaggerated," said Mohammed Alyahya, senior fellow at the Hudson Institute in Washington, DC. "Saudi Arabia is primarily concerned with keeping OPEC+ apolitical and focused on technical matters."