On Monday, oil prices rose by as much as 6% after Saudi Arabia, Russia, Iraq, and other members of OPEC+ announced that they would be cutting production by as much as 1.15 million barrels per day from May until the end of 2023.
The decision by OPEC+ to decrease oil production by a significant margin is expected to have a wide variety of knock-on effects. The production cuts have already pushed the cost of crude higher and will likely make gas more expensive in the US and other parts of the world.
Rising oil prices will also make it more difficult for the US Federal Reserve and other central banks to combat inflation. On the other hand, Russia looks set to benefit from a surge in prices, possibly providing a sought-after boost to its economy amid the war in Ukraine.
OPEC+ production cuts cause a surge in oil prices
In electronic trading on the New York Mercantile Exchange, the US benchmark crude oil surged by 5.6%, or $4.24, to reach $79.91 per barrel. Prior to the weekend meeting of the OPEC+ group, which includes oil-exporting countries, the price had already climbed by $1.30 to reach $75.67 per barrel.
During this meeting, the group decided on additional production cuts, on top of those which were announced last October, much to the chagrin of the Biden administration.
At the same time, the international oil pricing benchmark, Brent crude, saw a significant increase of 5.4%, or $4.35, to reach $84.24 per barrel.
What this probably means for the consumer is a hike in prices at gas stations. According to estimates by Kevin Book, managing director of Clearview Energy Partners, gasoline prices in the US could shoot up by approximately $0.26 per gallon.
This upward trend in the prices would be in addition to the typical surge in gasoline prices that occurs during the summer driving season when refineries switch to a different gasoline blend. The US Energy Department has calculated the seasonal increase at an average of $0.32 per gallon.
Members of OPEC+ have said that the production cuts are intended to stabilize the markets, but critics have accused the group of adopting the measure to make bigger profits.
The announced cuts by OPEC+ members are as follows:
- Saudi Arabia by 500,000 barrels a day
- Russia by 500,000
- Iraq by 211,000
- The United Arab Emirates by 144,000
- Kuwait by 128,000
- Kazakhstan by 78,000
- Algeria by 48,000
- Oman by 40,000
The Saudi Energy Ministry explained that the production cuts were brought about as a “precautionary measure” in order to help stabilize the oil market.
Meanwhile, Alexander Novak, the Russian Deputy Prime Minister, issued a statement saying the production cuts would “help balance market relations.” Novak described the current price cap placed on Russian oil and gas by Western states as “interference in market relations and continuation of the destructive energy policy of the collective West.”
Some analysts like Caroline Bain, chief commodities economist at Capital Economics, think that the decision of OPEC+ to slash production is motivated by geopolitical considerations. According to Bain, it “demonstrates the group’s support for Russia and flies in the face of the Biden administration’s efforts to lower oil prices.”
Other analysts have highlighted more general economic motivations. “Officially, the cartel wants price stability in oil markets,” commented Ipek Ozkardeskaya, a senior analyst at Swissquote Bank. “But in reality, they simply want higher prices.”