The major oil-producing nations, led by Saudi Arabia and Russia, have made the decision to reduce the amount of oil they contribute to the global economy. (OPEC+ Cuts Affect Gas )
That, according to the law of supply and demand, can only mean one thing: Crude oil, as well as the gasoline, diesel, and heating oil that are made from it, are going to have higher prices in the future.
The Western allies are attempting to limit the amount of oil money flowing into Moscow’s war chest following its invasion of Ukraine, so the OPEC+ alliance has decided to reduce production by 2 million barrels per day beginning next month.
The following is information regarding the OPEC+ decision, its potential effects on the economy, and the oil price cap:
According to Abdulaziz bin Salman, the Energy Minister of Saudi Arabia, the alliance is anticipating a possible drop in demand by adjusting supply ahead of time because a slowing global economy requires less fuel for industry and travel. (OPEC+ Cuts Affect Gas )
He said, “We are going through a period of diverse uncertainties which could come our way; it’s a brewing cloud.” OPEC+ wanted to stay “ahead of the curve.” He said that the group’s job was to “bring about stability” as a moderating force.
After a summer of highs, oil prices had dropped. They are on track for their biggest weekly gain since March following the OPEC+ decision. On Friday, the price of a barrel of benchmark U.S. crude rose 3.2 percent to $91.31.Even though Brent crude, the international standard, increased by 2.8 percent to $97.09 per barrel, it is still down 20% from its mid-June level of over $123 per barrel.
Concerns that high energy costs—for oil, natural gas, and electricity—will drive inflation and deprive consumers of their ability to spend are a major contributor to the decline.
Another explanation: Concerns that the conflict in Ukraine would result in the loss of a significant amount of Russia’s oil production to the market contributed to the summer highs. (OPEC+ Cuts Affect Gas )
Customers in India and China purchased those barrels at a significant discount, so the supply hit wasn’t as severe as anticipated because Western traders shunned Russian oil even in the absence of sanctions.
If the global economy declines faster than anticipated, oil producers are wary of a sudden price drop. That’s what happened during the COVID-19 pandemic in 2020 and during the global financial crisis in 2008-2009.
Because neither the United States nor the United Kingdom imports a lot of oil from Russia, they imposed mostly symbolic bans. Because EU nations obtain a quarter of their oil from Russia, the White House did not press for an import ban.
The 27-nation bloc ultimately decided to stop shipping Russian oil on Dec. 5, while keeping a small amount of supplies from the pipeline that some Eastern European nations rely on.
Beyond that, the details of a price cap on Russian oil are being worked out by the United States and other major democracies in the Group of Seven. It would target insurance companies and other companies that help Russia ship oil to other countries. This week, the EU approved a measure in that direction.
If the price rises above the cap, many of these service providers based in Europe would be prohibited from dealing with Russian oil.
The purpose of the price cap is to maintain the flow of Russian oil to the global market at lower prices. However, Russia has threatened to simply halt deliveries to countries or businesses that adhere to the cap. As a result, prices could rise as more Russian oil disappears from the market.
Costs at the pump could also rise as a result of that.
In the middle of June, gasoline prices in the United States hit a record high of $5.02 per gallon. Previously, they had been falling, but now they are on the rise again, posing a political issue for President Joe Biden one month before the midterm elections.
Biden, facing inflation at near 40-year highs, had touted the falling pump prices. The national average cost of a gallon has increased by 9 cents to $3.87 over the past week. That is an increase of 65 cents from what Americans were paying a year ago.
He told reporters about the OPEC+ decision, “It’s a disappointment, and we’re looking at what alternatives we may have.”
Probably yes. Jorge Leon, senior vice president at Rystad Energy, predicts that Brent crude will reach $100 per barrel by December. That is an increase from the previous prediction of $89. (OPEC+ Cuts Affect Gas )
Because some OPEC+ nations are unable to meet their quota, a portion of the 2 million barrels per day reduction is only theoretical. Therefore, the group can only deliver approximately 1.2 million barrels of actual cuts per day.
Leon stated that this will still have a “significant” impact on prices.
In a note, he stated that “higher oil prices will inevitably add to the inflation headache that global central banks are fighting” and that “higher oil prices will factor into the calculus of further increasing interest rates to cool the economy.”
That would raise gasoline prices worldwide and exacerbate an energy crisis in Europe that is largely caused by Russian cuts to natural gas supplies used for heating, electricity, and factories. People have less money to spend on other things like rent and food as a result of inflation.
The duration of China’s COVID-19 restrictions, which have reduced fuel demand, and the severity of any potential recession in the United States or Europe are two additional factors that could influence oil prices.
Before a price cap, analysts claim that Russia, the alliance’s largest producer and non-OPEC member, would benefit from higher oil prices. At least the reduction begins at a higher price level if Russia must sell oil at a lower price.
Earlier this year, high oil prices compensated for much of Russia’s lost sales due to Western buyers avoiding its supply. Additionally, the nation has been successful in rerouting approximately two-thirds of its typical Western sales to Indian customers.
However, as prices and sales volumes decreased, Moscow’s oil revenue decreased from $21 billion in June to $19 billion in July and $17.7 billion in August, according to the International Energy Agency. Since oil and gas revenues make up a third of Russia’s budget, price caps would further reduce a significant source of revenue.
As a result of sanctions and the withdrawal of foreign businesses and investors, the rest of Russia’s economy is shrinking.
