Some of the world's biggest oil producers are cutting back. A group of OPEC+ countries, led by Saudi Arabia, recently announced a surprise output cut of one million barrels a day. But do you know what OPEC and OPEC+ are? Or what the production cut implies? Let's find out.
Oil giants
The Organisation of the Petroleum Exporting Countries (OPEC) is an intergovernmental organisation that produces oil. It was created at the Baghdad Conference in Iraq in September 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Its establishment took place against a background of great change in the world with extensive decolonisation and the rise of many independent nations.
Headquartered in Vienna, Austria, the OPEC cartel is responsible for fixing the price of oil on the world market and managing supply. This is to avoid fluctuations in oil price that might affect the economies of oil producing and purchasing countries.
OPEC & OPEC+
OPEC is made up of 13 of the world's major oil-exporting countries-Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of Congo, Saudi Arabia, the United Arab Emirates, and Venezuela.
OPEC+ is, as the name suggests, OPEC plus other oil producing countries such as Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan. In other words, OPEC+ is a group of 23 oil-exporting countries which meets regularly to decide how much crude oil to sell on the world market. In 2016, when oil prices were low, OPEC joined these 10 oil producers to create OPEC+ to have greater control over the global crude oil market. These countries together produce about 40% of the world's crude oil.
Implication of the cut
Recently, a group of OPEC+ countries announced a surprise output cut of one million barrels a day in a bid to boost oil prices and support market stability. Russia, also part of OPEC+, said it was extending a previously announced unilateral cut of 5,00,000 barrels a day until the end of 2023.
The cut which will come into force from May this year is in addition to the cut of two million barrels a day announced in October 2022 which resulted in a 5% rise in oil prices globally. Recent crises in the banking sector in the US and Switzerland have raised concerns about the possibility of a recession in the near future, which might lead to a decline in demand for oil.
As for the background, demand for oil dropped drastically during the COVID pandemic. Hence OPEC countries decided to cut down production to prevent a supply glut. Besides there was a price war going on between Russia and Saudi Arabia, leading to a slump in oil prices. However, the Russian invasion of Ukraine in February 2022 pushed up oil prices raising concerns that the Western sanctions against Moscow could lead to an oil shortage. Following this, many countries stopped buying Russian oil in a bid to make its invasion unsustainable. The wealthy G-7 countries have also imposed a price cap on Russia's oil exports to keep the country's oil revenues low. Russia is now exporting more crude to India and China.
The idea behind cutting production seems to be to boost demand by lowering supplies. It is needless to say that this energy crisis is driving up global inflation.
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