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OPEC countries have made the decision to cut their output by 1.2 million barrels per day. OPEC countries came to this decision in conjunction with non-OPEC countries like Russia. The decision comes amid a global supply gut and falling oil prices. The oversupply of oil has plagued the international market and in turn has caused oil prices to fall. Saudi Arabia, the coalition’s largest oil producer will make by far the biggest cuts, more than 500,000 barrels per day.
The other major producers in Iran and Iraq have also agreed to make large cuts in output. OPEC was founded in the 60’s by five countries; Venezuela, Saudi Arabia, Kuwait, Iran and Iraq. The organization’s main goal was to take back control over its national resources from private actors and to receive fair compensation for their sale. This move marks a change in OPEC’s long-term policy of maintaining high levels of oil output.
Reason behind output cuts
The policy was designed to prevent loss of market share and to put pressure on non-OPEC oil producers like US shale oil producers. OPEC in the last few years has faced various challenges due to increased competition in the realm. This competition is mostly in the shape of US shale oil companies and the following boom in that industry. The repercussions of this policy however were not in favour of OPEC. The unintended consequence was the driving down of oil prices. Too much supply and stagnant demand tends to lower prices in most markets. This is precisely what happened here.
The decision to cut oil supply is an attempt to restore the status quo. In April of 2020, OPEC and some other ally states like Russia had come to an agreement to cut oil production by 9.7 million barrels per day as a response to the COVID-19 pandemic and the subsequent drop in demand for oil. This helped stabilize the oil economy then. This was later eased in 2021 as demand for oil had started to recover.
The move is likely to have a significant impact on the global oil market. Some analysts predict the move could increase oil prices by up to 10%. Although, a variable factor is whether non-OPEC producers, especially in the US, will continue to increase their output. The long-term feasibility of the industry and OPEC was still unaddressed. With growing threats in the renewable energy industry, the future of oil as a power source is under question.
These cuts will only provide temporary monetary relief, and OPEC does not seem to have a contingency plan. Regardless of the cuts, OPEC members have displayed some degree of skepticism. Some members consider the cuts to not be significant enough and that the resulting price increase will not be enough. Others have raised the issue of the economic impact of the cut on their own economies, especially the member states that are heavily reliant on oil income.
