The grouping of the world’s largest oil-producing countries, the Organisation of the Petroleum Exporting Countries (OPEC) and its allies, together known as OPEC+, decided to cut oil production by 2 million barrels per day (bpd) on Wednesday (October 5).
This is the largest cut since the beginning of the Covid-19 pandemic. Brent crude, the international benchmark, was up 28 cents or 0.3%, at $92.08 a barrel after the cut was announced, reported Reuters.
In light of recent falling gas prices, OPEC+ officials had decided in September to reduce oil output by a modest 100,000 bpd after they first agreed in the previous month to increase production by the same amount.
Established in 1960 by founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, OPEC has since expanded and now has 13 member states. With the addition of another 11 allied major oil-producing countries that include Russia, the grouping is known as OPEC+.
The objective of the organisation is to “coordinate and unify the petroleum policies of its Member Countries and ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry,” according to the OPEC website.
Previously controlled by western-dominated multinational oil companies known as the “Seven Sisters,” OPEC sought to give the oil-producing nations greater influence over the global petroleum market. They account for roughly 40 per cent of the world’s crude oil and 80 per cent of the globe’s oil reserves, according to estimates from 2018. They usually meet every month to determine how much oil the member states will produce.
However, many allege that OPEC behaves like a cartel, determining the supply of oil and influencing its price in the world market.
Oil prices skyrocketed after Russia’s invasion of Ukraine in February, and have since begun to soften over the past few months, before dropping sharply to under $90 in September due to fears of a recession in Europe and reduced demands from China because of its lockdown measures.
Today’s cut is the biggest of its kind since 2020 when OPEC+ members slashed outputs by 10 million bpd during the Covid-19 pandemic, Reuters reported. The reductions would boost prices and be extremely beneficial for the Middle Eastern member states, to whom Europe has turned for oil after levelling sanctions against Russia since it invaded Ukraine.
OPEC+ members are concerned that a faltering global economy would reduce the demand for oil, and the cuts are seen as a way to protect profits. Increased oil prices, which first occurred during the invasion of Ukraine, have helped Saudi Arabia, one of the founding members of OPEC, become one of the world’s fastest-growing economies, according to The Wall Street Journal.
The New York Times raised the possibility that Moscow might be influencing OPEC, to make it more expensive for the West to extend energy sanctions on Russia. “To the extent that prices rise, it will make it that much more challenging for Europe to proceed with its sanctions on Russian oil in December,” said Bhushan Bahree, an executive director of S&P Global Commodity Insights.
Within the group, there are those that are opposed to such significant cuts in oil production, and according to The Wall Street Journal, a meeting of OPEC+ technocrats was cancelled on Tuesday because of disagreements that reportedly only a gathering of oil ministers could resolve. The United Arab Emirates (UAE) and Kuwait, in particular, are said to be concerned that extended cuts would interfere with their plans to increase oil output capacity.
The move is likely to be highly detrimental to the US, which has repeatedly asked the organisation to increase oil production. President Joe Biden had travelled to Saudi Arabia in July, a country he had pledged to make into a “pariah” for its alleged role in the assassination of The Washington Post columnist Jamal Khashoggi, partly to request more oil. The modest increase of 100,000 bpd in August has since been replaced by attempts to reduce production by Saudi Arabia.
Slashes in reduction and subsequently increased oil prices can be particularly dangerous to Biden, who is trying to reduce inflation rates before the midterm elections in November. Over the past few days, Biden administration’s senior officials have been lobbying their counterparts in Kuwait, Saudi Arabia and the UAE to vote against reducing oil production, sources told CNN.
The US has not publicly accepted these attempts, however. White House press secretary Karine Jean-Pierre on Friday told reporters that the US is not part of OPEC+ and did not reveal any attempts made by her administration, as reported by The Wall Street Journal. “They are an independent entity and we allow them to make their news and their announcements on their own,” she said.