A group of oil-exporting countries known as OPEC+ met in Vienna Wednesday to make a decision that one day later is already impacting the lives of American consumers. The OPEC oil cartel, spearheaded by Saudi Arabia and the United Arab Emirates, joined with non-member allies, such as Russia and Iran, to curb oil production by 2 million barrels a day starting next month.
After the announcement, gasoline prices in the U.S. shot up 3 cents a gallon, according to AAA's daily report, making it the biggest one-day jump in months. The uptick comes as fallout from the war in Ukraine continues to curb global energy supply, making countries more sensitive to swings in the price of oil.
President Joe Biden on Thursday said he felt "disappointment" at the decision from OPEC+, a day after members of his administration called the cuts "shortsighted" and potentially damaging to the world economy.
"At a time when maintaining a global supply of energy is of paramount importance, this decision will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices," National Security Advisor Jake Sullivan and NEC Director Brian Deese in a statement.
Two million barrels a day equals about 2 percent of global oil output. That might not sound like a lot, but that amount is coming out of supply that largely goes into exports. In other words, it's oil that other countries buy to meet gaps in their supply. So even small swings can impact the broader market. Countries such as the U.S. are relatively energy independent, but they are still plugged into a globalized market, and thus vulnerable to price movements.
The question of why OPEC+ curbed production in the first place is harder to tackle, but according to its own explanation, the cuts stem from a desire to stay "proactive" in light of the "uncertainty that surrounds the global economic and oil market outlooks, and the need to enhance the long-term guidance for the oil market."
The backdrop for this explanation is that oil prices have fallen significantly since their eye-watering heights earlier this summer. The price of West Texas Intermediate, the leading benchmark for crude oil prices, fell from around $120 per barrel in June to around $84 per barrel this month. While this has been great for consumers, it means less revenue for oil exporters, and with predictions of a recession gaining steam, OPEC+ members appear to be preparing themselves for leaner times in the near future.
There's also a geopolitical dimension, which has been well-covered by major media outlets. America used to have more sway with leading OPEC member Saudi Arabia and how it controlled its oil supply. Now the country, headed by controversial Crown Prince Mohammed bin Salman, is acting more on its own and developing closer relationships with other powerful nations such as China and Russia.
These shifting relationships have put the U.S. in a diplomatic bind, as the Biden administration tries to maintain relations with Saudi Arabia, even as it faces pressure to hold bin Salman accountable for the murder of Washington Post reporter Jamal Khashoggi. The CIA recently determined that the Saudi royal ordered the assasination.
In the meantime, the U.S. has taken strides to become less dependent on foriegn oil. Deese and Sullivan touted the administration's efforts to develop green alternatives. "With the passage of the Inflation Reduction Act, the U.S. is now poised to make the most significant investment ever in accelerating the clean energy transition while increasing energy security, by increasing our reliance on American-made and American-produced clean energy and energy technologies," they said.
In addition, the administration noted that it will continue to release oil from the nation's Strategic Petroleum Reserves (SPR), with another 10 million barrels set to hit the market next month. This amount is part of the 180 million barrels that the administration committed to release back in March in order to bring down prices.
So far, the administration has not confirmed if it will commit to additional SPR releases in response to the production cuts, but some advocacy groups are calling on the federal government to make greater use of the reserve.
Two weeks ago, the progressive think tank Employ America outlined a plan to actively refill the reserve as a way to incentivize domestic producers to churn out more oil. In effect, government purchasing would serve as an insurance policy for producers, who could depend on a buyer regardless of what happens to the global economy.
"By stabilizing oil prices at a level acceptable for both producers and
consumers, the SPR has the ability to smooth the inflation outlook in the medium
term while stabilizing energy and gasoline costs for Americans," the group wrote. "Finally, this policy will ensure the economic viability of our existing foreign policy commitments and decarbonization investments in the longer term."