The OPEC+ surprise announcement to cut oil production 1.16 million barrels per day (bpd) shows that global market dynamics are again the deciding role in oil prices as the per barrel price in the United States spiked 5.31 percent to $84.13 a barrel. The price increase accounts for the largest rise in almost a year after U.S. producers ramped up production to stabilize prices for consumers and meet a continued global demand.

Source: Reuters

Millions of Barrels Locked Away

OPEC’s announcement continues their production cuts from October 2022, and brings the total volume of cuts to 3.66 million bpd from global supply. The announcement comes a week after the Biden Administration promised to veto H.R. 1, which aims to “expedite the development, importation, and exportation of energy resources,” and could increase domestic production capacity up to 3 million bpd –enough to cover the 1.66 million bpd announced cut in global production and nearly enough to make up for the entire production decrease.

As Independent Petroleum Association of America President and CEO Jeff Eshelman said:

“OPEC’s announcement emphasizes the importance of supporting U.S. oil production, with our federal government’s policies and with investment from the financial community. But producing oil is not like turning on a water faucet. It takes months to get production back up. If U.S. producers want to produce more oil, it takes six to nine months minimum to ramp up. The timeline for increasing production on federal lands is even longer, because of a lengthy bureaucratic permitting process. The bipartisan legislative package “The Lower Energy Costs Act” passed last week in the U.S. House of Representatives would make huge strides to increase production and lower costs for consumers, but what is really needed is a sustained vote of confidence in U.S. oil and natural gas from the top down. U.S. producers want long-term certainty.”

The world is safer when America is leading the charge in meeting global energy demand. Congress has supported this leadership w/initiatives like HR1 & lease sales, but it’s time we see the White House participating in U.S. energy dominance during a time of international crisis. pic.twitter.com/IxRhMiiE9h

— American Petroleum Institute (@APIenergy) April 4, 2023

A Grim Outlook For Oil Prices

Contrary to the administration’s frequent price gouging allegations directed at American companies, the sharp rise in oil prices following OPEC+ supply reductions illustrates the market is what truly determines the costs of energy resources, not individual companies. The key variables that caused the recent surge to more than $80 a barrel for oil are the same as they’ve always been: supply, demand, and geopolitics.

Energy Aspects founder Bob McNally warns that the combination of these variables increases the possibility that oil prices could reach $100 a barrel, if “Chinese demand goes back up to 16 million barrels a day [in the] second half of this year.” And the International Energy Agency further warns that the latest cuts risk further exacerbating the deficit in global oil supplies expected to emerge in the second half of the year.

The White House is downplaying the importance of the OPEC+ production cut, insisting that the big difference now is that global oil prices are around $80 per barrel, compared with $110 and $120 last year. But this is little comfort to American consumers who are still paying $1 more for gas now than since the Biden administration took office following record high prices last summer. Gasoline prices have been increasing slowly but surely over the last months, and are expected to increase further as the production cuts take effect.

Source: EIA

The production cuts also complicate the energy supply chains for global allies who are scrambling to secure energy supplies ahead of summer. In 2022, the United States increased its oil shipments to Europe 70 percent, and exports were projected to stay high following the European Union’s implementation of a ban on Russian diesel and other oil products in February. If supply becomes tighter, the United States’ ability to sustain those exports are in jeopardy, and prices on the European continent remain high. Already future gasoline contracts are trading at higher prices.

Bottomline: OPEC’s production cuts don’t go into effect until May, but the impact to the global economy now in unmistakable. While John F. Kirby, a spokesman for the National Security Council, is content to say the United States doesn’t have a seat at OPEC’s table and can’t advise against the move, there are definite actions the administration can take to stymie the impact.