OIL WARS: OPEC+ vs USA & UK

Submitted by-

Divyaraj Jain

SM0121021

Faculty in charge –

Shangky Khongwar

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY

GUWAHATI, ASSAM
Introduction
The Organisation of Petroleum Exporting Countries and their allies (also known as OPEC+), in
their recent meeting in early October, has made a shocking announcement that has shaken the
both US and UK economies. OPEC+countries including Saudi Arabia and Russia have jointly
decided to reduce their oil production by 2 million barrels per day (BPD), which nearly accounts
for 2% of the world's oil production. Both UK and US economies are on the brink of a recession
and this cut can lead them to greater levels of economic disaster. This cut is a clear signal of
improving ties between the Arabian countries and Russia. This cut will cause an acute shortage
in the global oil market and there is a clear intention behind this cut, all oil-producing countries
want to benefit from the rising price levels. Out of all nations, the US will feel the pinch more
than the rest. While the UK imports 11% of total oil, the US imports more than 40% of its oil.
The US in a counter-attack has proposed a ‘NOPEC’ bill while the UK government along with
European Union is deploying a price cap strategy. The OPEC group consists of Iran, Iraq, Qatar,
Kuwait, Saudi Arabia, UAE and ten other oil producing countries. In the year 2016 Russia had
also joined the organization which came to be known as OPEC+. This group accounts for more
than 50 % of the whole oil supply. The question comes up: why are they doing this cut? The
answer to this is very simple, they are causing something called the demand supply mismatch.
Which means they are trying to create a gap between the demand and supply of oil, due to
shortage of supply the prices are tend to go rise. The OPEC+ countries fear that if in the near
future the world economies goes into a recession the demand for oil will go down taking the
prices along with it as seen in the covid period. This is why the OPEC+ countries have decided
to reduce oil production and create a supply shortage. As expected the price of oil saw a jump of
1.7% from $91 to $93. This is how the OPEC+ uses its monopoly to assert dominance over the
world economy.
This will create multiple problems for both the US and UK. Firstly the UKis a;ready suffering
from a on going energy crises where the energy bills are souring due to the disruption in natiral
gas supply from Russia because of the sanctions impossed on it. Secondly the US economy is
seeing highest levels of inflation in the past 40 years and the rising oil prices will add to the
misery. Lastly, an increase in oil prices means higher revenue for Russia. Looking at the
statistics, Russia has infact generated higher oil and gas revenue under sanctions as compared to

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the period without sanctions. This means the sanctions imposed by the west proves to be
ineffective and Russia is better able to fund the war against Ukraine.
‘NOPEC’ bill
To counter the OPEC nations and Russia's selfish decision to cut oil production and benefit their
economy at the cost of other economies , the US has decided to go forward with something
called the NOPEC bill. By this bill the US wants to amend the US Antitrust law to revoke the
immunity that OPEC sovereigns and their oil producing companies enjoy against legal
proceedings by the US. If it is signed into law the US can start proceeding against the oil cartels
and Saudi nations. They want to take this oil cartel to court and accuse them of weaponizing oil
supply. Firstly Saudi King and other OPEC+ leaders including Putin are like not normal citizens
that can be dragged into court and can jail them. So the question is what is the leverage that the
US has and what is the usage of the bill. Secondly, this is not the first time that the US has
brought up a similar bill and in the past whenever this bill has been brought up the US has been
blackmailed by the Saudi. Yes, the US was blackmailed by the Saudi. For this we need to
understand the extraordinary leverage that the Saudi has against notjust the US but the whole
world itself. First of all Saudi Arabia is the biggest importer of US weapons. This number is so
big that it is even greater than the total imports by the next 4 biggest weapon suppliers to Saudi
combined. Although the Saudi can boycott weapons from the US and buy them from Russia, the
US cannot afford to boycott OPEC+ and buy from elsewhere. If the Saudi stops buying weapons
from the US, the US weapon suppliers will suffer major losses and in turn will stop funding the
party in power and then they will lose power. Secondly, do we know why the US dollar is a
major reserve currency? This is because in the year 1945, Franklin Roosevelt and the Saudi King
made a deal whereby the Saudi agreed to sell oil exclusively in dollars and in exchange the US
will supply weapons and protect Saudi from wrest. This is the reason why countries all across the
globe have US dollar reserves in US banks which then get invested in US bonds and total
amount of these bonds is close to $7 trillion. This means that the US gets $7 trillion in debt just
because the Saudi and other OPEC countries buy oil exclusively in dollars. Therefore if Saudi
due to this counter-attack starts selling oil in Rubles, trillions of dollar bonds will be sold and be
invested in Russian banks which means a complete change in currency exchange layout. This is
why if the US brings this bill to the table, they will be blackmailed by these OPEC nations. So
why is it that the US is again attempting to pass this bill when it is aware of the consequences?

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The difference here is that this time it is not just the US fighting against the Oil cartels, even the
UK and other European countries have joined hands to fight back the OPEC and Russia and
bring down oil prices. Therefore if we again look at the Saudis weapon imports after the US,
other European countries are its next big weapon suppliers. Considering the geographical
position of the Saudi which is surrounded by volatile and sensitive borders. On top of that Saudi
has a very small army of just 127000 to give an idea of how small it is, the US has a total of
more than 2.2 million active and reserve personnel. So if the US evacuates its own troops and the
weapons supply carts, Saudi will be left vulnerable to its enemies.1
‘Price cap’ strategy
Apart from the US, the EU and UK have deployed a strategy to circumvent the rising oil prices
and they are calling it the ‘Price Cap’ strategy. This strategy for now will be applied to Russian
oil only but if the situation becomes adverse it can even be extended to the OPEC countries.
What is this strategy and how will it help Europe? As long as oil is sold to Europe, all European
countries can come together to form an oil cartel and agree to buy oil at just $60 dollars a barrel
and not a penny more. This will force Russia to sell its oil to Europe at the decided price.2 The
problem with this strategy is that other nations beyond the European union can still be sold oil at
different prices. The EU and Uk can still try to influence other nations by putting sanctions on
them and trying to influence them to not buy oil from Russia. However even this can be avoided
by other nations. For example- If India wants to buy oil from Russia but it cannot directly do so
as it could be seen as India is favoring Russia. In order to remove this spotlight from India, the
ship carrying oil from Russia can have a layover at China and then can continue its journey to
India from there. No matter what the geo-political situation is in the west, nations like India will
always look for their benefit and even the shipping companies transporting the oil are least
bothered about the geo-political situation until they are earning. By this India can declare this
Russian oil as Chinese oil and can maintain the relations with the west while benefiting its own
economy. It was even in the news that China has done this and sold Russian oil as Chinese to
Europe. To battle this backdoor selling of Russian oil, the European Union has brought in its
‘Insurance Superpower’. Insurance in a shipping industry is extremely important as the value of

1
Timothy Gardner, ‘What is NOPEC, the US bill to pressure the OPEC+ oil group?’, The Indian Express (October
6,2022).
2
Jorge Valero, ‘EU Countries Plan to Delay Russian Oil Price Cap Amid Divisions’, Bloomberg's (September 26,
2022).

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the ship itself could be as high as 600 to 1000 crore rupees. Along with this the cargo it carries is
also worth some hundred crores so in total a value of a ship traveling runs in thousand crores .
Therefore a shipping company may not care about sanctions but for them insurance is very very
critical because one bad oil spill or a damaged ship could put the whole company out of business.
The fun fact is that an international group of 13 marine insurance companies cover
approximately 90% of the world's oil shipping fleet. This group is based in London and the EU
has applied sanctions and measures against these insurance companies whereby they are forcing
them to not give insurance to ships carrying Russian oil sold at price more than $60. Therefore
the UK and the EU without directly interfering with the transaction between Russia and India are
able to make Indian buyers abide by the price cap strategy by using these insurance companies as
proxy.
Conclusion
The OPEC+ has weaponized oil using a very basic contempt of demand and supply. Oil, in
today's industrialist and rapidly growing world, is as essential as air and water. The Middle East
is trying to create scarcity of oil by cutting down on the supply to benefit from the rise in prices
as the demand for oil is not nearly inelastic. Even with the rise in the shift to green energy
sources, oil still plays a major role in energy production. We see this kind of use of demand in
supply in our day-to-day lives as well, for example when certain daily commodity life vegetables
are hoarded by big sellers and create an artificial scarcity in the market then sell later at higher
than usual prices. If the Saudi and other OPEC+ nations continue to reduce production it will
increase the global oil prices, and with the already struggling US and UK economies, there is a
high probability of the two going into recession. So all trade and services from India to the west
will be affected. Secondly with the rising oil prices India’s trade deficit is deepening to alarming
levels along with which the currency is also depreciating. Therefore after a certain point this
could result in disaster for the Indian economy as well. Lastly if the US and UK succeed in
controlling the Middle East and Russia and they cap the prices of oil we will actually benefit
from this as we can buy oil at cheaper prices. Along with this if these counter-attacks succeed
India will also be able to maintain relations with both the west and Russia because it’s not we
who are bringing down the prices but the UK insurance companies bringing down the prices.

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