On Wednesday, representatives of the thirteen members of the Organization of the Petroleum Exporting Countries (OPEC) and their ten allies announced a drastic cut of two million barrels per day in November. Why? Do they just want to influence the price of oil or are there other reasons? Does this mean that we will soon have to pay more for petrol and diesel?
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Last update:
07-10-22, 11:37
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After reaching historically high prices at the pump lately, oil has been falling for several consecutive months. Last June, the 159 liter barrel of Brent from the North Sea peaked at $120. By the end of September, its price had dropped to less than $83.
For its part, OPEC+ fears that the price will fall even further in the event of a global recession. A situation that will lower demand and therefore the price.
An affront to Europe
Faced with this, the solution is all found: produce two million barrels less every day for a year. By reducing supply, OPEC+ hopes to drive up prices.
But behind this apparent simplicity also hides another geopolitical reality.
“Russia and Saudi Arabia, the informal leaders of OPEC+, both have political motivations. The two countries worked hand in hand to push through the decision,” says professor of international politics Thijs Van de Graaf (University of Ghent) in HLN.
Indeed, the diplomatic benefits of lower production are obvious for Russia. “She shows that she is not alone following the sanctions imposed by the West, that she still has allies following the invasion of Ukraine. Moreover, it is a response to the embargo imposed by Europe on Russian oil. From December 5, imports of Russian oil by sea to Europe will be prohibited. And soon, all petroleum products will also be banned from entering. The reduction in production is therefore a counter-attack from Russia which tells us: ‘if you introduce an embargo, we will reduce production. Prices will increase and so will our income,” explains Thijs Van de Graaf.
Bad news for Joe Biden
Saudi Arabia, for its part, wants to thumb its nose at the United States following Joe Biden’s recurring criticism of human rights in the country.
Important thing to know: the United States is one of the largest oil producing countries in the world, but is not a member of OPEC+.
“By allying with Russia, the Saudis are giving Biden the middle finger. The production cut comes a month before the U.S. midterm elections. If prices go up at the pump, that’s bad news for the incumbent,” explains the professor.
In other words, Russia and Saudi Arabia are killing two birds with one stone by cutting oil production. But will the measure have the “desired” effect? Will oil prices actually rise, as OPEC+ hopes? Will we have to pay more at the pump?
Price increase
“I don’t have a crystal ball,” says Thijs Van de Graaf. “Besides, only half of the price at the pump is determined by the price of crude oil. The rest is made up of taxes and excise duties. So far, the markets have not reacted particularly nervously following the OPEC+ announcement. Oil prices have risen, but not dramatically. This first reaction is usually a good indication of what to expect in the future. But OPEC+ has tightened supply a little more in an already very uncertain period. Moreover, the Russian oil embargo is yet to come. Therefore, I think that indeed the prices will rise once more.”
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