Saudi Arabia and other major oil producers announced on Sunday that it would cut production by as much as 1.15 million barrels per day from May through the end of the year. The move is predicted to increase prices globally.
The higher oil prices would aid Russian President Vladimir Putin in filling his coffers as the Kremlin continues its war on Ukraine and force Americans, along with other countries dependent on Middle East oil, to pay more at the pump amid soaring worldwide inflation.
The move is also likely to add further strain to ties with the U.S., which has requested Saudi Arabia and other allies to increase production as it works to squeeze Russia’s finances and bring prices down for consumers.
Production cuts alone are predicted to push gasoline prices in the United States up by around 26 cents per gallon, along with the additional increases that come when refineries switch to the summertime blend during the summer driving season, according to the managing director of Clearview Energy Partners LLC., Kevin Book. The Energy Department estimates the seasonal increase will be around 32 cents per gallon, according to Book.
With the national average for U.S. gasoline averaging $3.50 per gallon of regular, according to AAA, the gasoline of over $4 per gallon and higher in other areas should be expected.
Complex variables are involved in gas and oil prices
According to Book, several complex variables are involved in gas and oil prices. The size of each country’s production cut is dependent on its baseline production number being used. It may take at least part of the year for the cuts to take effect. While demand could fall in the U.S. if the country enters a recession caused by the ongoing banking crisis, it could also be earlier as travel increases over the summer months.
Although the production cut is only around 1% of the approximate 100 million barrels of oil the world uses daily, the overall impact of prices could be significant, according to Book.
“It’s a big deal because of the way oil prices work,” said Book. “You are in a market that is relatively balanced. You take a small amount away; depending on what demand does, you could have a very significant price response.”
Saudi Arabia announced the most significant cut among OPEC members of 500,000 per day. The cuts came with a reduction announced last October that enraged the Biden administration.
The Saudi Energy Ministry characterized the move as a “precautionary measure” to stabilize the oil market.
In addition to the Saudi cuts, Iraq said it would reduce production by 211,000 barrels per day, Kuwait by 128,000, the United Arab Emirates by 144,000, Kazakhstan by 78,000, Algeria by 48,000, and Oman by 40,000. Each country’s state media carried the announcements.
Meanwhile, Russia’s Deputy Prime Minister Alexander Novak said Moscow would extend its voluntary cut of 500,000 until the end of the year. According to remarks carried out by Tass, the state news agency. Russia announced the unilateral reduction in February after Western countries imposed price caps.
All the countries are members of the OPEC+ group of oil-exporting countries, including the original Organization of the Petroleum Exporting Countries, Russia, and other significant producers. OPEC issued no immediate statement.
The October cuts, equaling two million barrels per day, came on the eve of the U.S. midterm elections in which soaring prices were a critical issue. At the time, President Joe Biden vowed there would be “consequences,” and Dem lawmakers called for freezing any cooperation with the Saudis.
Saudi Arabia and the U.S. have denied any political motives in the dispute.
Since the cuts, oil prices have trended lower. Brent crude, an international benchmark, was trading around $80 a barrel at the end of last week, down from about $95 in early October, when the previous cuts were agreed upon.