In November 2016, the Organization of the Petroleum Exporting Countries (OPEC) agreed to give way to the cut off two million barrels of oil per day, raising the value of international oil prices by 7% in just one week. In fact, countries such as Russia, which is not a member of OPEC, pledged to reduce production by 600,000 barrels of oil per day. Thanks to this agreement, Iran -for example- will now increase its daily output from 3.7 million to 4.3 million barrels of oil per day. However, why do these global powers unite in a cartel like OPEC?
After the Yom Kippur War in 1973, the Arab League led by Saudi Arabia and Egypt decided to reduce by 5% per month the sale of oil to the United States and its allies. However, this “Arab anger” was a response to the military aid that the United States provided to Israel during the Yom Kippur War in 1973.
Although this embargo lasted only six months, the so-called ‘1973 Oil Crisis’ caused a global economic chaos. Nonetheless, this crisis was key for Saudi Arabia’s-where shallow oil was discovered in the 1930’s- economic boom after the crisis. At the beginning of the 20th century, Saudi Arabia was a poor country, with no roads and a very weak army. After the settlement of many American oil companies there, the United States established multiple military bases to protect its interests. In danger scenarios, as when Saddam Hussein invaded Kuwait in 1991, this protection was key for Saudi Arabia not to be at risk. Despite the 1973 Oil Crisis, Saudi Arabia maintained its oil sale to the West at the end of the embargo. This is one of the reasons why Saudi Arabia maintains “good” relations with the United States.
This is why Donald Trump did not include Saudi Arabia, even though 2,000 Americans have been killed by Saudi citizens, on the list of Arab countries that were banned from entering the United States. Do you now understand? On the other hand, Saudi Arabia is the largest oil producer in the world, with 10 million barrels per day despite not having the largest oil reserves in the world. Venezuela has the largest oil reserves, followed by the United States.
That is why joining OPEC is not a miracle, but part of Saudi Arabia’s intentions to privatize a large part of Saudi state oil company ARAMCO, and to save the economies of the Gulf kingdoms. Saudi Arabia, despite falling of oil prices between 2014 and 2015, was reluctant to take serious steps as this would, for example, delay the full entry of the renewable energy sector into the international market. Undoubtedly, the world learned in 1973 that OPEC and Saudi Arabia are key elements that can determine the direction of global economy.