Members of the Organization of Petroleum Exporting Countries, and its non-members which includes Russia (OPEC+), agreed this week to reduce its oil production goals by 2 million barrels per day.
The immediate reaction from President Biden was disappointment, and he said he would order the release of another 10 million barrels of oil from the Strategic Petroleum Reserve, which would make his total release somewhere around 240 million barrels this year. The SPR is at its lowest level since 1984.
Biden had publicly asked OPEC to increase – not decrease – production this summer.
The US Oil and Gas Association Tweeted: “OPEC says no, SPR all but gone. The WH has one option left and it is the one option they never should have turned away from in the first place – the US base oil and gas industry. Life comes at you fast…”
The impact of the announced cuts on the global oil supply could be much smaller than 2 million b/d. Many OPEC members have not been able to meet their quota during the last two years.
And Russia, the largest exporter next to Saudi Arabia, is in unknown territory because the U.S. and many European countries have placed sanctions on oil exports due to its invasion of Ukraine.
Shortages of supplies and increases in demand are sure signs that an increase in price is on the way, which adds to the pressure on inflation, which increases the possibility of a global recession.
OPEC doesn’t seem to be worried very much about inflation or even a recession. They are concerned about protecting their crude oil markets. OPEC has increased and decreased production occasionally as the global oil market changed. It happened in the 1970s when oil supplies to the U.S. were reduced. Prices rose. Inflation reached double digits. OPEC’s market dominance continued into the 1980s when supplies finally caught up with demand and prices fell to $10 per barrel in 1986.
In 2015, OPEC members increased production significantly driving prices down in the U.S. to $30 per barrel in hopes of running the “high-cost” shale drillers out of business. It did force thousands of independent oil producers across the nation to close their doors forever.
OPEC cut oil production by 10 million b/d in the spring of 2020 when Covid-19 began to spread. The primary reason for the reduction was economies around the globe went into hibernation and there was reduced demand for oil.
As economic conditions began to improve OPEC raised its production quotas this year by 648,000 b/d in July and again in August and 100,000 b/d in September.
OPEC’s new production target is 41.8 million b/d down from 43.8 million b/d, but the actual production will be about 600,000 b/d from current production.
The Wall Street Journal reported commercial oil stocks in industrialized nations were down 148 million barrels this summer compared with a year ago and 279 million barrels lower than the latest five-year average, OPEC said in its latest report. The group expects demand for its crude to rise by 900,000 barrels a day next year compared with 2022.
OPEC+ produces more than half of the world’s crude oil.
Alex Mills is the former President of the Texas Alliance of Energy Producers.
Alex Mills is the former President of the Texas Alliance of Energy Producers. The Alliance is the largest state oil and gas associations in the nation with more than 3,000 members in 305 cities and 28 states.
