FRANKFURT, Germany — Major oil-producing countries led by Saudi Arabia and Russia have decided to slash the amount of oil they deliver to the global economy.
And the law of supply and demand suggests that can only mean one thing: higher prices are on the way for crude, and for the diesel fuel, gasoline and heating oil that are produced from oil.
The decision by the OPEC+ alliance to cut 2 million barrels a day starting next month comes as the Western allies are trying to cap the oil money flowing into Moscow’s war chest after it invaded Ukraine.
Here is what to know about the OPEC+ decision and what it could mean for the economy and the oil price cap:
WHY IS OPEC+ CUTTING PRODUCTION?
Saudi Arabia’s Energy Minister Abdulaziz bin Salman says that the alliance is being proactive in adjusting supply ahead of a possible downturn in demand because a slowing global economy needs less fuel for travel and industry.
“We are going through a period of diverse uncertainties which could come our way, it’s a brewing cloud,” he said, and OPEC+ sought to remain “ahead of the curve.” He described the group’s role as “a moderating force, to bring about stability.”
Oil prices have fallen after a summer of highs. International benchmark Brent crude is down 24 per cent from mid-June, when it traded at over US$123 per barrel. Now it’s at US$93.50.
One big reason for the slide is fears that large parts of the global economy are slipping into recession as high energy prices — for oil, natural gas and electricity — drive inflation and rob consumers of spending power.
Another reason: The summer highs came about because of fears that much of Russia’s oil production would be lost to the market over the war in Ukraine.
As Western traders shunned Russian oil even without sanctions, customers in India and China bought those barrels at a steep discount, so the hit to supply wasn’t as bad as expected.
Oil producers are wary of a sudden collapse in prices if the global economy goes downhill faster than expected. That’s what happened during the COVID-19 pandemic in 2020 and during the global financial crisis in 2008-2009.
HOW IS THE WEST TARGETING RUSSIAN OIL?
The US and Britain imposed bans that were mostly symbolic because neither country imported much Russia oil. The White House held off pressing the European Union for an import ban because EU countries got a quarter of their oil from Russia.
In the end, the 27-nation bloc decided to cut off Russian oil that comes by ship on December 5, while keeping a small amount of pipeline supplies that some Eastern European countries rely on.
Beyond that, the US and other Group of Seven major democracies are working out the details on a price cap on Russian oil. It would target insurers and other service providers that facilitate oil shipments from Russia to other countries. The EU approved a measure along those lines this week.
Many of those providers are based in Europe and would be barred from dealing with Russian oil if the price is above the cap. (AP)
