The Organisation of the Petroleum Exporting Countries and its allies (OPEC+) have recently been in the headlines for their significant decision to cut oil production by 2 million barrels per day (bpd), marking the largest cut since the advent of the Covid-19 pandemic. This article delves into the reasons behind this move, the expected impacts on various countries, and an overview of the OPEC+ itself.
Motivations Behind The Oil Production Slashes
Recent events have significantly affected the global oil market. Russia’s invasion of Ukraine contributed to a sky-rocketing increase in oil prices which later began to soften over time. The prices dropped to below USD 90 in September 2022 due to fears of a European recession and reduced Chinese demands triggered by lockdown measures.
The Middle Eastern member states of OPEC+ stand to benefit from these reductions as Europe has turned to them for oil following sanctions against Russia. Fears of a declining global economy reducing oil demand have also influenced this decision. Higher oil prices, first seen during Ukraine’s invasion, have boosted countries like Saudi Arabia, allowing it to become one of the world’s fastest growing economies.
Impacts of Production Cut
On European Countries
Recently, the European Union announced a plan to cap prices on Russian oil exports. With the latest supply reduction from OPEC+, global oil prices are likely to remain high, presenting Russia with the opportunity for significant revenue from its crude exports.
On the U.S
This move could severely affect the US, which has repeatedly requested increased oil production from OPEC+. Reductions in production and consequent rise in oil prices could be detrimental to the US’s efforts to reduce inflation rates before the November 2022 midterm elections.
On India
India, which imports almost 85% of its crude oil needs, will witness an increase in the oil import bill due to higher prices. This can lead to inflation, a rise in the Current Account Deficit (CAD) and fiscal deficit, weakening of the rupee against the dollar, and a negative impact on stock market sentiments.
About OPEC+
Founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, OPEC has grown over the years to include 13 member countries, with Qatar terminating its membership in 2019. An alliance with ten other major oil-producing nations led to the formation of OPEC+. These countries aim to coordinate and unify petroleum policies to stabilize oil markets and ensure efficient supply, steady income for producers, and fair return on investment for players in the petroleum industry.
Formerly controlled by western-dominated multinational oil companies known as the “Seven Sisters,” the formation of OPEC shifted greater influence to oil-producing nations over the global petroleum market. The organization accounts for roughly 40% of the world’s crude oil and 80% of the globe’s oil reserves. However, allegations persist that OPEC operates like a cartel, manipulating oil supply and thereby influencing its price in the world market.