Domestic Production Necessary To Address OPEC Production Cuts Through 2024
OPEC+ and Saudi Arabia’s oil production cuts will impact global oil price and American consumers. While the Biden administration has called these cuts short-sighted, it has failed to plan for the long term and consider the value of domestic production for Americans and global consumers.
Short Term Impact
Saudi Arabia will unilaterally shut in 1 million barrels per day (bpd) of oil production beginning July 1. The reduction was announced in April, and is a continuation of Saudi Arabia and OPEC+ ongoing production cuts.
In October, OPEC+ announced that it would cut 2 million barrels per day from global production, only to increase that reduction to 3.66 million bpd with a surprise announcement in April, causing oil prices to climb. And at the most recent OPEC+ meeting where Saudi Arabia announced its unilateral production cut in the short term, the entire alliance agreed to increase the production cuts by an additional 1.4 million bpd starting in January 2024, and extend the total 5 million bpd shut-in through 2024.
Saudi Arabia’s voluntary cuts will reduce the country’s monthly production from roughly 10 million bpd in May to 9 million bpd in July, which is predicted to be the biggest slowdown in years. According to Saudi Energy Minister Prince Abdulaziz:
“This is a Saudi lollipop… We wanted to ice the cake. We always want to add suspense. We don’t want people to try to predict what we do…This market needs stabilization.”
But as we saw last summer, significant declines in delay tend to result in price increases.
Oil and Economics
Without corresponding domestic production increases to counter the OPEC production cuts, prices at the pump will inevitably rise and contribute to elevated inflation. According to the U.S. Federal Reserve Chair Jerome Powell, “as a rule of thumb, every $10 per barrel increase in the price of crude oil raises inflation by 0.2 percent and sets back economic growth 0.1 percent.”
The inflation rate hit 9.1 percent last June, the highest it’s been in 40 years. Inflation has gradually declined over the past several months 4 percent as of May 2023, coinciding with a 1.5 percent decrease in oil price over that same time period. However, the American economy – and American politics – remain sensitive to anything that may drive inflation back up, and Saudi Arabia’s production cuts will arrive during peak driving season for Americans, just as gas prices were becoming affordable again and the political campaign cycle heats up.
This time last year, gas prices were at a record high, reaching $5 for regular unleaded fuel and nearly $6 for diesel. But instead of looking to energy resources at home, the Biden administration lobbied OPEC to increase production, and got in return the smallest oil production increase in OPEC history – 100,000 bpd.
The United States cannot depend on OPEC+’s graciousness to stabilize energy supply any longer. It’s imperative that the United States take responsibility for the country’s energy needs and allow domestic production to meet national and global demand. Otherwise, the U.S. economy will remain at the mercy of foreign energy producers.
Bottomline: While high oil prices may be a boon for Saudi Arabia’s economy, reduced supply of oil on the global market will raise gas prices for Americans and increase the costs of travel and leisure activities as soon as this summer. The price impacts are only set to grow through 2024 and ripple across the economy as approximately 6 million bpd of production is shut in by OPEC+ member states. The United States has the resources to stave off the worst impacts and should look to domestic production as a meaningful solution.