Last month, the Union of Oil Producing Countries OPEC led by Saudi Arabia, it announced it would reduce oil production under the pretext of concern for its economy and that of the world. This has deeply angered the Americans and other Westerners, who say the deal was reached to spite them and support Russia, which started the war in Ukraine. Despite threats from the White House to stop selling military equipment and provide support in the fight against terrorists, representatives from Saudi Arabia and the United Arab Emirates (UAE) continued to defend their decision in November and it is unlikely that they will move, thus keeping the price of oil above 90 dollars a barrel.
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Although many parts of the world are rapidly switching to renewable energy resources, oil is still, and according to experts, at least for the next few decades, the main source of energy and, consequently, the main engine of the economy. Estimates vary, but it is estimated that between 88 and 100 million barrels of oil are consumed worldwide every day. As a result, oil is still a powerful engine of the economy, which also gives a lot of power to the countries that extract it.
The excuse is the economy
The major oil producing countries are the USA, Russia, Saudi Arabia, Canada and Iraq. Of the top ten producing countries, five are members of OPEC, which works with Russia and other countries in the OPEC + organization. OPEC + represents 40% of the entire world oil market.
Earlier last month, OPEC + countries agreed that November oil production would be reduced by two million barrels per day. The organization justified this with falling prices, as crude oil prices have dropped 30% since June amid fears of a global economic downturn.
The announcement was alarming for global markets and angered Europe and the United States. “The impact of the decision is far-reaching,” Barbara Leaf, the assistant to the US Secretary of State for Middle East Affairs, told reporters shortly after the announcement in Kuwait, adding that it came “at the worst time. possible, “as the world was just emerging from the coronavirus pandemic and facing the aftermath of the Russian invasion of Ukraine.
Experts cited these countries’ close relations with Russia as one of the reasons for OPEC’s decision.
Although US President Joe Biden said that “there will be consequences” for this step, according to “ABC”, Arab countries are defending their decision. Saudi Energy Minister Prince Abdulaziz bin Salman hinted at the Abu Dhabi International Oil Exhibition and Conference that he would not move: “We owe nothing to anyone but ourselves.”
“I can assure you that we in the UAE, as well as our OPEC + colleagues, want to provide the world with what it needs,” said UAE Energy Minister Suhail Al Mazroueh, immediately adding: “Not we are the only producers in the world. “
Representatives from other oil producing countries also said that the decision to reduce oil production was made to stop inflation, which has a negative impact on the whole world. As “The New York Times” recalls, in 2008 the global financial crisis brought the price of oil down from one hundred dollars a barrel in September to 40 dollars a barrel in December. Saudi Arabia hopes to prevent a similar situation by cutting production now. True, as some experts said and has already written “Delfi Business”, the reduction is symbolic, because due to obsolete and neglected infrastructure during Covid-19, the members of the organization are not already reaching the previously determined higher quotas.
So far, the US has yet to take revenge and, as “The Economist” points out, Washington does not have many ways to “retaliate” without harming US consumers, who are already hostile to the government due to inflation.
Effect on the price
The cut in oil production started this month, and as a result, in December it will be possible to understand how it affected the economy. But already this week, crude oil prices started to rise. True, as “Reuters” points out, this has less to do with OPEC’s decision, but with falling dollar value and rumors that the Chinese government will ease its Covid-19 restrictions. That is to say, the markets expect that in China, with the easing of restrictions, consumption will increase.
The price could also be affected G7 price caps for Russian oil destined by countries. That is to say, the economically stronger countries do not want to completely give up oil, but to limit its price and thus, as the superpowers hope, reduce Russia’s ability to finance the war in Ukraine. The price of oil has not yet been determined, but as reported by Reuters it could hover around the historical average of $ 64, which is well below the November 2 price of $ 94 a barrel.
The maximum price will be in effect from December, but loads uploaded before December 5th but downloaded before January 19th will have no restrictions. The G7 intends to achieve compliance with the price ceiling by denying the provision of the various services necessary for shipping to those who do not comply. Moscow has indicated that it will not accept the rules pushed by the G7 and Australia.
In the “S&P 500” market review, however, experts say it may be difficult for Russia to find a way to transport and sell this oil. In most cases, the shipping of the G7 countries and the EU will not run the risk of circumventing the sanctions, however experts also warn of “shadow shipping”, already in place for the actions of Venezuela and Iran.
“Several European owners will continue to deliver Russian goods regardless of problems with insurance and other shipping services,” says S&P 500 analyst Fotios Katsols. “This is likely to happen through new schemes, including new companies recently established elsewhere, such as the United Arab Emirates “.
Russia is expected to increase exports to China, India and other countries not involved in the sanctions.
However, in general, according to the US Energy Agency, without major shocks, the price of oil per barrel is likely to remain within current limits.
