How does OPEC+’s decision to cut oil production impact the global economy?

Key Takeaways:

1. OPEC nations have agreed to cut oil production, which is a reason to worry for many oil importers globally.

2. OPEC nations dominate the global oil and gas industry and control around 50% of the global oil supply. They decide the oil prices.

Oil and gas are major industries in the energy market and have a significant role in the global economy. Currently, this industry is amongst the most discussed topics worldwide following the recent decision made by OPEC+ countries to reduce oil production by 2 million barrels per day.

OPEC+ member states plan to cut production starting November 2022 after gathering for their meeting in Vienna headquarters. The Group said that the decision was based on uncertainty related to the global economy and oil outlook. Rising interest rates and a weakening global economy were the reasons for the reduction in oil production.

Following this announcement, brent crude prices improved. On 12 October 2022, Brent oil Futures currently stands at ~US$94.40.

Swissquote analyst Ipek Ozkardeskaya pointed out that this cut might backfire against OPEC+ if investors fear it will drive inflation higher and compel central banks to increase interest rates so the extent that it can result in recession.

On the other side, the impact of the oil product might impact the European countries, which are currently undergoing an energy crisis. It is possible that Europe may have to experience further trouble this winter with the OPEC+ member's decision to cut oil production.

With this backdrop, in this article, we will try to understand the significance of oil and gas in the global economy and how it will impact the global economy. But before that, let’s learn about crude oil.

About Crude oil

Crude oil is a naturally liquid petroleum product that comprise of hydrocarbon deposits as well as other organic materials formed from animal and plant remains that lived millions of years ago. These organisms were covered by layers of sand, silt, and rocks and eventually turned into fossil fuel that is refined into a usable product like diesel, LPG, gasoline, and feedstock for the petrochemical industry.

Oil War:

As pointed out above, OPEC nations have decided to cut oil production, which can impact the prices in the coming days. The increase in oil prices will have a ripple effect on the broader economy. Rising oil prices mean higher gasoline prices at the pump, increased shipping cost, and increase input cost, which ultimately impacts the pockets of the common people.

At the same time, OPEC is looking to put a floor on its oil prices. US President Joe Biden visited Saudi Arabia in July in a bid to increase oil production. It will help to cool gasoline prices which could hurt the US economy when they reach sky-high. The US now feels that the ongoing development related to oil production cuts is against the Western interest. They are now thinking of reassessing the US alliance with Saudi Arabia.

The US and many OPEC clients are now looking to move away from oil into renewable energy sources. The US is also planning to revive the NOPEC bill, allowing the US to sue countries in the OPEC trying to limit the oil supply and increase oil prices.

Meanwhile, it is also in the news that the US government is planning to ease sanctions on Venezuela to allow Chevron Corp to pump oil into the country.

Factors that will decide oil prices in the coming period:

The crude oil price is determined by the demand and supply of the oil in the market. If the supply of oil is less compared to the demand, then the price will move up.

One of the factors which will cause prices to move up is the reduction in the oil production which we have discussed above. Another important factor which might impact oil prices in the coming days is the COVID-19 restriction in China. They are still focusing on a zero-COVID-19 strategy with lockdown in the country and travel restrictions in place, which will keep the prices in control.

Interestingly, China is the largest importer of oil in the world. With the ease in the lockdown in the country, we may expect to see further rise in the demand for oil and its cost.

Impact of increased oil prices on an economy:

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