OPEC+ cuts raise fears of inflation, dollar erosion

OPINION:

The Biden administration couldn’t have been happy to see OPEC and Russia announce a massive supply cut totaling 1.6 million barrels per day. This raises fears of a resurgence of inflation — oil prices jumped $7 a barrel on the news — as well as continued deterioration of the dollar’s status as the world’s reserve currency.

This comes after 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 is down by half since President Biden took office — from 638 million barrels in January 2021 to 371 million today. That’s just over 18 days’ worth of oil at a time when our national security concerns are growing.

So why do it? Likely because, after two years of strangling domestic production while driving inflation with out-of-control spending, the Biden administration had to keep oil prices low enough to salvage the midterm elections for the Democrats. And flooding reserves into the market does that temporarily.

And that brings us to the latest move from OPEC and Russia. Before the midterms, the White House had promised to stop the drawdowns immediately after the elections — yes, Washington is that cynical — and then refill it if prices got too low, specifically when oil prices reach around $67 to $72 per barrel.

This promise to refill was akin to a price floor on oil, reassuring OPEC that they could keep pumping despite a slowing world economy, which would normally depress oil prices.

But two weeks ago, the administration flipped and broke that promise: They decided to keep draining the reserve, no doubt delighting green activists who want the U.S. to “decarbonize” in favor of unreliable and expensive wind and solar energy.

According to the Financial Times of London, it was precisely this policy flip that drove 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.

This is very bad timing — a perfect storm, you might say, for oil prices — after the White House just spent years strangling domestic production. Those moves include blocking pipelines for cheap oil from Canada and North Dakota, blocking exploration on 16 million acres, and even threatening oil companies with bankruptcy and their executives with jail. Hardly an ideal strategy for eliciting new investment in production.

In raw numbers, that strangle knocked production down by a third compared with the Trump-era trend — about 4 million barrels a day. For scale, Saudi Arabia produces only 9 million barrels. Republicans just last week introduced legislation to reverse this decline and replace more OPEC oil with domestic production.

So what’s next for regular Americans? These production cuts will, all else being equal, lead to higher prices for gasoline, for heating fuel — really for everything, since energy goes into everything: factories, delivery trucks, electric bills, groceries.

And what’s next for the dollar? 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 decadeslong relationship is under threat, it carries wider implications for America’s ability to sustain influence on the world stage.

Paired with ongoing banking and inflation concerns at home, Sunday’s OPEC+ move could erode a key plank of the dollar’s 80-year dominance of global financial markets, indeed of the global economy, earned over those decades by our rule of law and heretofore relatively prudent monetary if not fiscal policy.

Finally, the OPEC+ move 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.

Quite a day’s work for Mr. Biden’s White House.

• Peter St. Onge is the Mark A. Kolokotrones Fellow in Economic Freedom at The Heritage Foundation.