A Day Before Winter, OPEC Cuts Oil Production by Two Million Barrels

On Oct. 5t, following a meeting in its Vienna headquarters, the Organization of the Petroleum Exporting Countries (OPEC) announced that its member countries would be cutting oil production by two percent, or two million barrels a day, taking effect in November. The announcement was made against the backdrop of rising energy costs and a looming global recession. Indeed, it is global economic uncertainty that the organization claims underpins its decision to cut oil production, citing its desire to balance supply in the face of decreasing demand as its core motivation. 

Founded in 1960, the Organization of the Petroleum Exporting Countries sought to counter the United States’ hegemony over oil production and now controls 40% of production and 80% of the world’s reserves, vesting the cartel with immense pricing power. The organization has not shied away from exercising its dominance. Older generations are haunted by the devastating effects the cartel’s oil embargo had on the price of oil and the U.S. economy in the 1970s. Its recent actions have again highlighted its pricing power, as oil prices surged from $76.71 per barrel to $92.64 in response to its announcement that it would cut production. 

At first glance, the decision seems motivated by the desire to steer prices back toward the highs they experienced earlier this year. The price of oil hit a peak of $122 in June; however, since then, it has steadily fallen to below $90. The announcement was designed, in part, to counter falling prices and benefit the revenues received from oil exports. Other factors are contributing to the volatility of global oil prices. Supply shocks lingering from the COVID-19 pandemic — which saw oil prices briefly slip into the negatives — mean that global supply cannot keep up with demand rapidly returning to pre-pandemic levels due to the robust expansionary fiscal policy wielded by western leaders as an answer to the pandemic. Equally, many countries, especially those in Europe, that have chosen to halt buying oil from Russia in response to Putin’s invasion of Ukraine are facing unprecedented supply challenges as they seek alternatives to their long-lasting reliance on Russian gas imports.

According to National Public Radio, some pressure from Russia may have invigorated the decision-making process, as “they effectively came and asked OPEC to cut production by a million barrels a day.” Such observations further suggest the protagonist role that the war in Ukraine is playing in the emerging resource crisis. This, especially, has influenced calls from some governments for Volodymyr Zelensky to enter negotiations with Putin to de-escalate the conflict. 

Beyond the immediate price increase of oil, the impacts of the Organization of the Petroleum Exporting Countries’ decision will perpetuate a common trend in the past year. Energy firms drilling for and selling oil will see profits rise even higher as they continue to reap record profits. British Petroleum (BP) announced $8.2 billion in profit at the end of October, its second highest on record. At the same time, households face even higher costs just as winter begins setting in, with the prospect of energy rationing not out of the question in many European countries.