Not only has it delivered higher world oil prices,but it has enabled Russia’s to break through the $US60 a barrel cap,backed by sanctions,the G7 economies (plus Australia)have imposed on its oil exports.

In August,the price of Russia’s flagship crude,Urals,averaged $US74.54 a barrel,well above the cap and well above the year-to-date average of $US58 a barrel.

While shipping and other costs would be steep and reduce the net price it is receiving,the higher prices are more than offsetting the lower volumes of oil Russia is producing – its revenues fromthose exports are rising. While its oil exports generated $US4.1 billion less in August than a year earlier,according to the International Energy Agency,they were $US2.5 billion higher in August than in July.

That may mean that the G7 will have to review the effectiveness of the sanctions.

With some oil industry analysts predicting the oil price could reach $US100 a barrel this year,the Saudis’ and Russians’ strategy,while successful thus far,could ultimately be counterproductive.

In the first half of this year there was heavy demand for oil from China and India,particularly for Russian oil as they bought as much as they could below or around a cap that was significantly below global prices. China has built significant reserves. The extent of their buying has,however,dwindled as prices have risen.

If oil prices at the current level or even higher are sustained,it will have a chilling effect on global economic activity at a time when the global economy is fragile and vulnerable.

The US has been able to generate solid growth despite the steep increase in interest rates and India is powering on,but China’s economy has been spluttering and slowing and Europe,thanks to the impact of Russia’s invasion of Ukraine on energy supply and prices,China’s slowing economy and rising interest rates to combat inflation,is struggling.

Last year the US was able to muffle the impact of earlier production cuts by OPEC and its associates by drawing on its strategic petroleum reserve. With the SPR now at 40-year lows – it contains about 100 million barrels less than it did a year ago – it won’t be able to blunt the impact of the recent price surge.

Higher petrol prices will feed into higher inflation rates and could force the Fed into rate rises it wouldn’t otherwise have made,risking a US recession.

China can draw on its cheaply acquired reserves – reserves acquired in anticipation of a sharp rebound in its economy that hasn’t occurred – to avoid paying the elevated market prices. Its contribution to global growth,however,has contracted.

A global recession,with high oil prices the straw that proved too much,would significantly reduce demand for oil and therefore the price.

The Saudis and Russians will need to be careful that they don’t squeeze the market so hard that they end up undermining their own market and experiencing lower prices on the lower production volumes.

That concern may be why the Saudis have said that,while the cuts will remain in place until the end of the year,they will still review them monthly.

That caveat may also be a recognition of the political clout a tight market gives them at the start of a US political cycle.

Petrol prices are a top of mind issue for US consumers and voters and expensive petrol and resurgent inflation would weaken Joe Biden’s ability to argue that he has delivered significant economic gains.

The relationship between the Saudis and the US has wilted during the Biden presidency – Crown Prince Mohammed bin Salman had,and still appears to have,a strong relationship with key members of the Trump administration and the Trump family – but the Saudis have sought significant diplomatic and security support and approval for large purchases of military equipment from the US.

High oil prices in the lead up to next year’s US elections give the Saudis some leverage in negotiations. Oil remains a powerful influence on not just the global economy but geopolitics.

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