It is the first face-to-face meeting of representatives of the oil-exporting countries since the beginning of the Corona pandemic and it is one that is attracting a lot of attention: At 2:30 p.m. this Wednesday in Vienna, a total of 24 delegates from member states of the OPEC oil cartel and other oil exporters (summarized ” Opec+”) together. It had already become known over the weekend that the meeting would be about a production cut of one to two million barrels a day. That would be the most drastic cut in years. And the news had an effect: as soon as the markets opened on Monday, the price of oil shot up by around five percent. The world is nervously awaiting the news from Vienna given the bleak outlook for the global economy and high energy prices. What exactly is happening and how do the decisions affect the individual? Answers to the most important questions.
Why is OPEC so important anyway?
The 13 members of the cartel have lost importance in recent years. Their response was to bring in other oil-exporting countries, led by Russia. Together, this network is called Opec+ and accounts for a good 40 percent of global production and even around three-quarters of global reserves. “These states organize a good part of the market. In any case, that’s enough to at least stabilize the oil price,” says energy expert Andreas Goldthau from the Institute for Transformative Sustainability Research at the University of Potsdam. The importance of the cartel can also be seen in the fact that the US has been urging Opec+ to pump more oil out of the ground in recent months. American President Joe Biden even felt compelled to travel to Saudi Arabia in the summer. A visit that critics saw as kowtowing to the regime. However, the trip did not bring much to Biden, and the oil cartel then only increased its production cosmetically.
Why do the Opec+ countries want to cut production?
The 23 member states of the expanded oil cartel have one goal that unites them: they want to stabilize prices, in their own interest. Because after the acute price jumps on the oil market after Russia’s attack on Ukraine, a downward trend has become apparent in recent months. A barrel of oil (about 159 litres, a common unit of measurement for crude oil) of the North Sea variety Brent, which is decisive for the world market, recently cost just over 90 euros. In June it was more than 120 euros. If the most important oil producers now reduce their production – and the countries involved then stick to their quotas – this will tighten the supply on the world market and counteract the fall in prices. However: “Some important states are not currently promoting the amount that they have promised anyway,” says Andreas Goldthau from the University of Potsdam. “A subsidy cut would therefore be a signal to the market that OPEC is ready and wants to influence the psychology of the market.” Historically, however, oil is still expensive.
Why have crude oil prices recently fallen again?
First, the increasing demand for energy after the lockdown phase of the pandemic caused oil prices to rise, then came the war: the Russian invasion of its neighboring country triggered an oil price shock in early March. Within a few days, the Brent price had risen by more than a third. US and later EU embargoes on Russian oil helped oil prices settle at higher levels. Now the tide has turned. The global economy is heading for a recession, the demand for oil is expected to rise less than assumed in the summer – and possibly fall in some regions of the world. In addition, the US administration, led by Joe Biden, released part of the country’s strategic oil reserves in the summer in a bid to depress domestic fuel prices amid November’s upcoming congressional elections. All of this led to the gradual fall in prices over the past few weeks.
What do the Opec+ decisions mean for the global economy?
If the cartel members decide to make a radical cut, this could trigger a further shock to the global economy, especially since inflation due to energy costs is already slowing down companies and private households in many places. Crude oil is still the most important energy resource in the world, its price is in every production process and in all services. If the Opec+ countries decide to set a drastic limit, this should annoy the USA. A reaction from Washington would not be unlikely. “It’s hard to overstate how concerned the Biden administration is about a potential rebound in oil prices,” Rapidan Energy founder Bob McNally told Bloomberg. “A big Opec+ cut would anger the White House.”
What would a fuel price cut mean?
“Quite simply: Rising oil prices also mean rising petrol prices,” says Manuel Frondel from the Essen Economic Research Institute RWI. However, because of the decisions in Vienna, he does not expect “any crazy price movements”. Because the connection between the price of oil and the price of petrol is close, but not the only decisive factor. After all, far more than half of the price at the pump consists of taxes and duties, the price of crude oil plays a comparatively small role. The strong dollar had recently also contributed to high fuel prices. Oil is traded almost exclusively in dollars. So if the dollar exchange rate rises in relation to the euro, the prices at the pump often rise as well. The recently comparatively high diesel prices have less to do with oil prices, they can be explained by the fact that refinery capacities were lost due to the war in Ukraine.
How united is Opec+?
The two most important producers of the extended cartel and the second and third largest oil producing countries in the world after the USA, Saudi Arabia and Russia, had apparently already consulted closely before the conference. Both supported a substantial production cut of 1.5 to 2 million barrels a day. Russia has an interest in a general increase in prices because it has increased its oil reserves in the face of Western sanctions and still has to sell to alternative buyers, especially in Asia, at an enormous price discount. Oil exports are the main source of income for the Putin regime. Saudi Arabia would also benefit from higher prices. The country has no problem finding customers for its oil, produces with one of the highest profit margins of all export countries and is opposing the once close ally USA with its cooperation with Russia. “This isn’t the Saudi Arabia it used to be, and the US may have been a little slow or unwilling to acknowledge that on energy issues,” said Raad Alkadiri, an analyst at Eurasia Group Financial Times. “If they want a higher oil price, they’ve made that clear, they’ll go for it.”