Americans may soon be feeling an even bigger pinch at the pumps. Major oil supplier Saudi Arabia is reducing how much oil it sends around the world. The country hopes the latest cut will prop up the sagging price of crude for itself and other countries that depend on oil money.
The slump in oil prices in recent months helped U.S. drivers fill their tanks a little less expensively and gave consumers worldwide some relief from inflation.
That’s not good news for Saudi Arabia.
Saudi Energy Minister Abdulaziz bin Salman says the 13 countries of the Organization of the Petroleum Exporting Countries (OPEC) “will do whatever is necessary to bring stability to this market.”
So the kingdom plans to cut one million barrels per day starting in July. The slash comes as OPEC+ (OPEC members plus 10 more countries) agreed to extend previous oil cuts through next year.
Saudi Arabia is the dominant producer in the OPEC oil cartel. The kingdom was one of several members that agreed on a surprise cut of 1.6 million barrels per day in April. That followed an October cut of two million barrels per day.
All told, OPEC+ has now dropped production by around 3.5 million barrels per day—over three percent of global supply.
But previous cuts did little to boost oil prices. In fact, a dip in gas costs has helped U.S. drivers kicking off summer travel. Pump prices are down over a dollar per gallon from a year ago, according to auto club AAA. Falling energy prices also helped decrease inflation in the 20 European countries that use the euro.
Meanwhile, the Saudis need sustained high oil revenue to fund grand development projects, including a $500 billion futuristic desert city project called NEOM.
Oil producers like Saudi Arabia must take into account the impact of higher prices on its oil-consuming customers. Oil prices that go too high can fuel inflation. That can sap consumer spending and raise interest rates—which in turn can slow economic growth.
Another wrinkle involves the fact that the Saudi production cut and any increase in oil prices could help Russia pay for its war against Ukraine. Russia, a member of OPEC+, has happily found new oil customers in India, China, and Turkey.
Under the OPEC+ deal, Russian Deputy Prime Minister Alexander Novak says Moscow will extend its voluntary cut of 500,000 barrels per day through next year, just as it’s supposed to.
But Russia might not follow through on its promises. After all, experts say Russia has already found ways to get around OPEC limits by tampering with location data or transferring oil from ship to ship to disguise where it came from. And according to the International Energy Agency, Moscow’s exports of oil and refined products rose in April to a post-invasion high.
The new round of cuts will likely push up oil prices.
“Gas is not going to become cheaper,” Leon says. “If anything, it will become marginally more expensive.”
Many are the plans in the mind of a man, but it is the purpose of the Lord that will stand. — Proverbs 19:21
(The OPEC logo outside OPEC’s headquarters in Vienna, Austria. AP/Lisa Leutner)
