The price of gas could be set to jump again if OPEC+ follows through on plans to cut oil production by more than a million barrels per day. It would be the largest reduction in supply since the world’s infamous response to COVID-19 in 2020.
The possible decision by OPEC is intended to “prop up falling oil prices,” according to Wall Street Journal’s reporting on this. It would no doubt destabilize the global economy and strain Western consumers amidst already-crushing inflation.
OPEC+ will be meeting in person in Vienna on Oct 5, changing its original plan for a video-conference call.
It’s obvious one doesn’t call the in-person meeting at the very last minute unless the group is planning for big oil production cuts | #OOTT
— Javier Blas (@JavierBlas) October 1, 2022
For perspective, a million barrels per day is about 1% of global demand. Recent reductions of 100,000 barrels have resulted in a price increase of about 3%. So, this move could potentially be ten times worse for market prices.
With crude at less than $90 per barrel today, having fallen rapidly from its lengthy stay at $100+ due to the destabilizing effects of Russia’s invasion of Ukraine, the oil cartel seeks to reestablish their higher profits with this enormous cut in supply.
Talk of a 1m cut in oil production from OPEC is presumably their effort to stop oil prices falling below $70-80 which is looking like a bigger threat as even Korea’s exports drop YoY (seems we don’t need their semi-conductors so much anymore) pic.twitter.com/Oev85v7A1I
— Charlie Robertson (@RencapMan) October 3, 2022
The effect of the policy, though, is of great concern to the Western world, as it would benefit Russia, one of the largest oil producers in the world and an OPEC+ nation.
White House press secretary Karine Jean-Pierre on Friday declined to speak on the matter, alluding to the fact that the U.S. is not a part of the organization. “They are an independent entity and we allow them to make their news and their announcements on their own,” said the useless prop.
Established in 1960, OPEC (Organization of Petroleum Exporting Countries) is an alliance of oil-producing countries, mostly in the Middle East, including Saudi Arabia, Iran, Iraq, Libya, UAE, and Venezuela. Member countries combine to produce 35% of global supplies.
OPEC+ is considered an extension to OPEC of ten additional countries, including Russia, Sudan, and Mexico, which together have a 20% market share, bringing OPEC’s sphere of influence on global prices to 55%. OPEC sometimes makes decisions to cut production and makes deals with these additional “ally” countries to cooperate, deepening the effects of those decisions.
The world has never seen a thumb so large as the one that is now on the scale of market price with OPEC+. When they boost production, it is to bolster ‘market stability’. When they cut production, it is to increase demand and therefore profit margin. Their stated goal is to keep supply and demand balanced, but a production cut of this magnitude would increase prices at a time when they are already at historically high levels.
President Joe Biden and his administration have asked OPEC+ to pump more oil to help bring down the price of gasoline. Ahead of Biden’s Saudi Arabia trip this summer, OPEC+ made deep production cuts so that they could respond with a modest (and apparently temporary) increase in production.
There have been warnings that this policy move could make recessions worse in some countries:
Adel Hamaizia, a visiting fellow at the Center for Middle Eastern Studies at Harvard University, said the move could make #recessions worse in some countries. He explained that the production cut could push inflation higher and hurt #oil demand further. https://t.co/MQBfJPR8Rz
— WTI Trading Group- 🇺🇸 US Crude Oil Trader🛢️🌎 (@DB_WTI) October 3, 2022
China, where there is slowing economic growth, is turning to Russia for cheaper oil, while Europe pays more to Middle Eastern countries on principle, having ceased to buy oil from Russia since the invasion.
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