GP Short Notes

GP Short Notes # 674, 9 October 2022

OPEC: The curious case of OPEC's production cuts
Bhoomika Sesharaj

What happened?
On 5 October, the 13 members of the Organisation of Petrol Exporting Countries (OPEC) and 10 allies of the group forming the OPEC+, which includes Russia, met in Vienna to drop oil production quantities by two million barrels per day (bpd). Producing about 30 per cent of the world’s crude oil, this decision comes as the world grapples with an undersupply of oil by 1 million barrels per day and creates a tight supply of oil to the West which is already sifting through an energy crisis. 
“A recession is one of the challenges we are looking at. We all know a recession affects supply and demand,” UAE’s Energy Minister Mazrouei said, and said that economic stressors were the key reason why the agency decided to cut production. The oil quota reduction came as a surprise to the West as they warned the organisation against such drastic measures, but the meeting offered no resolve to countries like the US, the UK, and the EU. 
The OPEC defended its stance to say that the cuts were not meant to pit one country against another, but was a “pre-emptive measure”. Citing that the move was necessary, the decision was met with criticism by the US which said that OPEC was "aligning” with Russia. This decision was also considered a blow to the European Union, as sanctions on Russian crude oil and oil production are set to take effect starting in December. This said that OPEC+ does not target pricing but strikes “a balance in supply and demand.”

What is the background?
First, the evolution of the organization. The OPEC is a permanent, intergovernmental organisation created at the Baghdad Conference in 1960, and was initially a five-member organisation, including Iraq, Kuwait, Saudi Arabia and Venezuela. Later joined by eight others, and other non-OPEC allies, the OPEC was formed to stabilise oil pricing and strengthen oil production in the global market.  The OPEC sees prominence in the control of domestic petroleum, and battled excessive volatility in the 1980s and 1990s, with the Southeast Asian economic downturn and economic recession. The OPEC strives to string a well-oiled supply of crude oil to the market and has developed as an essential organisation over the years. The OPEC, however, has a history of battling with the West regarding its pricing and oil policies. 
Second, significance of the recent decision to reduce production. OPEC nations, along with Russia, produce over 10 million barrels per day and add a great deal to the demand and supply of the global market. The OPEC deals strongly with the US dollar, as oil production and crude oil are dominated by the currency. OPEC’s decision to cut output by 2 million barrels per day comes at a time when the global market seeks saving from inflationary rises and high pricing, leading to an extensive dependency on short-term energy services. 
Third, implications for the US. The US is grappling with soaring interest rates and President Joe Biden’s campaign for mid-term elections long-standing assurance of capping oil prices. The refinery issues plague the West coast and Midwest putting the US in a considerably stiff position, where the US already sees an undersupply of oil. The country’s dependence on Strategic Petroleum Reserves (SPRs) leads to a concerted decline in its overall reserves and leaves a depleting graph for the US to work with.  
Fourth, implications for Russia. Russia seeks to increase prices while maintaining a balanced output as it already produces over 9.9 million barrels per day, short of its 11 million barrels per day. The undersupply sees a larger output for Russia to work with, with sanctions on the country coming to effect later this year. The country is speculated to side with Saudi Arabia against the US, the New York Times reported. This move could mean the alignment of the two against the West’s concerted efforts to restrict Russian oil. 
Fifth, implications for the global market. OPEC’s move highlights the increasing rates of inflation, consumer prices and intensive political tensions as the EU’s position in the global economy recedes with the quick transitory trends of the energy sector. The reduction in oil would create divisions between EU leaders over capping oil prices and fighting over the lack of fuel. The decision comes as a forecasting warning to the energy security crisis that the EU could face in the winter, and lead to a larger economic problem of juggling between consumption, saving and selling of oil. This comes as a shock to India as well, with the freezing price of petrol and diesel seeing a potential rise, with producers forgoing their previous small profits of INR 5 before the decision came out. The underlying realisation of this decision lies at the overall scenario of the world economy as it strikes against unsustainable energy budgets, implications of a stronger dollar, and the economic risks of selling assets.

What does it mean?
For the US, the cut could lead to a reproaching of a kind, with the US seeking Venezuela and Iran out of its ‘pariah’ state and looking for sustainable options to produce its own domestic oil. For Russia, there is no reduction in output as part of the production cut decision by OPEC, rather it sees a slight balance in its reach. For the global market, the decision would incite a lower energy demand in the long term, with consumers seeking less energy-consuming services in the future.

30 October 2022 | GP Short Notes # 681
Putin's address in the Valdai Club" Four Takeaways
30 October 2022 | GP Short Notes # 680
Elon Musk's Twitter deal
23 October 2022 | GP Short Notes # 679
The UK: Liz Truss' resignation spins political chaos
16 October 2022 | GP Short Notes # 677
UN deems Russia’s referendums illegal
13 October 2022 | GP Short Notes # 676
China: UNHRC proceeding on Xinjiang
9 October 2022 | GP Short Notes # 675
Trade and Statistics Outlook 2022-23: Four takeaways
9 October 2022 | GP Short Notes # 672
Reducing Inequality Index 2022: Three Takeaways
2 October 2022 | GP Short Notes # 665
The new DART Mission: A new era of planetary defence

29 September 2022 | GP Short Notes # 669
Iran: Protests spark against hijab rules
25 September 2022 | GP Short Notes # 664
Putin and Russia's New Ukraine Strategy
22 September 2022 | GP Short Notes # 668
EU's food waste 2022: Three takeaways
18 September 2022 | GP Short Notes # 663
Sweden: 2022 elections reflect political polarization
18 September 2022 | GP Short Notes # 662
SCO Summit 2022: Who said what
16 September 2022 | GP Short Notes # 666
Global Estimates of Modern Slavery 2021: Six takeaw
16 September 2022 | GP Short Notes # 665
North Korea: New legislation hinders denuclearization talks

16 September 2022 | GP Short Notes # 664
Ukraine: Counteroffensive in Kharkiv and Kherson
11 September 2022 | GP Short Notes # 661
Bangladesh: Sheikh Hasina’s State visit to India
11 September 2022 | GP Short Notes # 659
Russia: Military exercise Vostok 2022

8 September 2022 | GP Short Notes # 658
The UN report on Xinjiang: Four Takeaways
1 September 2022 | GP Short Notes # 656
Iraq-Al-Sadr Withdraws, Protests Intensify
7 August 2022 | GP Short Notes # 653
Sri Lanka starts bailout talks with IMF
31 July 2022 | GP Short Notes # 651
Tunisia: Referendum paves the way for one-man rule

24 July 2022 | GP Short Notes # 649
Putin’s meeting with Khamenei and Erdogan
17 July 2022 | GP Short Notes # 648
Elon Musk Versus: 'Twas a troll after all
3 July 2022 | GP Short Notes # 643
NATO 2022 Strategic Concept: Four takeaways

26 June 2022 | GP Short Notes # 639
Saudi Arabia: Rapprochement with Turkey

26 June 2022 | GP Short Notes # 638
Europe: Approving Ukraine's candidature for the EU
8 May 2022 | GP Short Notes # 635
EU: New sanctions on Russia

24 April 2022 | GP Short Notes # 631
Russia: New nuclear-capable ICBM test

17 April 2022 | GP Short Notes # 629
Elon Musk and the battle for Twitter
10 April 2022 | GP Short Notes # 627
New actions and sanctions on Russia

28 March 2022 | GP Short Notes # 625
Europe: The new focus on defence
28 March 2022 | GP Short Notes # 624
The G7 Summit: Focus on Russia and Ukraine’s defence
20 March 2022 | GP Short Notes # 622
China: A careful strategy on Russia and Ukraine
13 March 2022 | GP Short Notes # 620
China: Fifth Session of the 13th NPC
13 March 2022 | GP Short Notes # 619
Ukraine: The Versailles declaration of the EU leaders

6 March 2022 | GP Short Notes # 617
Sanctions against Russia: Effects and Divides
12 February 2022 | GP Short Notes # 614
Quad summit in Australia: Focus on the Indo-Pacific 
12 February 2022 | GP Short Notes # 613
The One Ocean Summit: A framework toward conservation
5 February 2022 | GP Short Notes # 612
Escalation and de-escalation in the Ukraine crisis
29 January 2022 | GP Short Notes # 610
The Normandy Format: Europe, Russia and Ukraine
15 January 2022 | GP Short Notes # 609
Mali: Tensions escalate as ECOWAS imposes sanctions
15 January 2022 | GP Short Notes # 608
Kazakhstan: Russia, China and the protests
15 January 2022 | GP Short Notes # 606
India, China 14th round of military talks in Ladakh
8 January 2022 | GP Short Notes # 605
The US: Remembering 6 January

Click below links for year wise archive
2021 | 2020 | 2019 | 2018

Click here for old Short Notes