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OPEC + decision to reduce oil production: motives and repercussions
Oct 13, 2022
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OPEC + decision to reduce oil production: motives and repercussions

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The OPEC+ group of oil exporters agreed on October 5 to reduce daily oil production by about 2 million barrels representing 2% of the daily global needs. Saudi Arabia and Russia equally cut one million barrels per day; and the other million is divided between Iraq and UAE with 400,000 each, and the rest of the reductions is distributed among more than 15 countries.

The consensus comes in the context of Western countries’ struggle to secure their energy needs, and the wave of global inflation that dominates global markets. This means a further rise in energy prices, as the price of a barrel of oil went up by more than two dollars after the decision was announced. It is likely to rise further in the coming days.

White House spokeswoman Karen Jean-Pierre considered that the OPEC Plus countries "stand by Russia”. After the OPEC+ decision, there were leaks in Washington that Congress may go into activating a federal antitrust law, meaning that the United States will enter into a bone-breaking battle with OPEC itself.

This decision comes when the US administration is preparing for the midterm elections in the United States, which will take place on November 8, and in light of Washington's efforts to help Europe secure oil resources at reduced prices before the onset of winter. Furthermore, it comes few months after President Biden's visit to Riyadh, which mainly aimed at urging Saudi Arabia to increase daily oil production to reach 13 million barrels, to which the Saudis partially responded to, before agreeing at the OPEC + recent meeting to significantly reduce production.

The decision is in the interest of the oil-producing and exporting countries in terms of their ability to increase their resources at a high oil price and, consequently, amend financial imbalances that resulted from low oil prices during the Covid-19 epidemic. Furthermore, it helps these countries’ positions in the discussions of important files. Saudi Arabia, for example is seeking to obtain Western recognition of its rights in any agreement that takes place with Iran; and it also wants to pressure the West to agree to rehabilitate Crown Prince Mohammed bin Salman. Russia, as well, believes that such a decision comes in its favor and at the right time, in terms of possible pressure on the West in the field of oil and gas, to help Moscow weaken Europe in the energy war that Putin hopes to win during the winter.

It is expected that the United States will increase its production capacity and reduce its strategic oil reserves, which will push the price of oil down to its previous levels. European countries will remain the weakest link in the current energy equation in the short term, but in the long run, many transformations may be revealed; especially in relying on various oil sources to break the monopoly of major producers in the energy market. This makes the decision of these countries “short-sighted”, according to the US President.

From an economic view point, oil-importing countries will be facing a difficult economic situation, especially at the door steps of winter. Financially and even politically, such a decision will be in the interest of the OPEC + countries, but in the short term. However, the coalition's decision at this particular time appears to be a clear blackmail of Washington, which may have profound effects on the relationship of some coalition countries with the United States, and may result in the payment of heavy political and economic costs in the medium and long terms.

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