By Raquel Hoshino
The world was surprised this Sunday (2) with two announcements: that eight countries belonging to the expanded Organization of Petroleum Exporting Countries (OPEC+) would reduce oil production from May until the end of the year by 1.16 million barrels per day (bd).
And that Russia, a group member that had unilaterally reduced its production in February by 500,000 barrels per day, would also extend this deadline to the end of the year.
In total, there will be a cut of 1.66 million bd.
The announcement was made one day before the entity’s monthly meeting.
According to the Reuters news agency, the group was expected to maintain its previous decision to achieve production cuts of 2 million bd by December, which had been announced in October.
In a statement after the meeting, OPEC+ confirmed what was said at the weekend and detailed how the cuts will take place:
- Saudi Arabia will reduce its pumping by 500,000 barrels per day;
- Iraq by 211,000 bd; the United Arab Emirates by 144,000 bd;
- Kuwait by 128,000 bd;
- Kazakhstan by 78,000 bd;
- Algeria by 48,000 bd;
- Oman by 40,000 bd; and Gabon by 8,000 bd.
As reported by EFE, all these “voluntary” reductions, without a binding and consensual agreement within the alliance, will be applied from May until the end of 2023.
On Monday (3), the markets reacted, with oil prices skyrocketing and rising more than 6%.
A barrel of Brent, the main international reference, reached its highest value since March 7: US$86.44.
MARKET REACTION
According to Paulo Feldmann, an economics professor at the University of São Paulo (USP), the announcement was not a surprise.
“I don’t think the world was surprised because it is usual for Saudi Arabia to do this.”
“The oil producers have been acting very speculatively in recent years,” he said.
According to Saudi Arabia’s energy ministry, the voluntary reduction was a precautionary measure to support the stability of the oil market, Reuters reported.
Feldmann explained:
“That’s the big problem when you have a cartel. Cartel is something that is prohibited in the whole world.”
“You can’t have a cartel in any sector of the economy, in any country.”
“The only exception is OPEC+.”
“Because cartel is a very bad thing.”
“They agree among themselves what they want to do; they increase the price when they want to increase it; they decrease it; they increase production; they decrease production, but they do it harming society as a whole, the world economy.”
For Russian Deputy Prime Minister Alexander Novak, the Western banking crisis was one of the reasons behind the cut, as well as “interference in market dynamics,” a Russian expression to describe the Western-imposed price ceiling on the country’s oil.
The OPEC+ statement added:
“The meeting noted that this is a precautionary measure to support oil market stability.”
The United States, meanwhile, believes “that these cuts are not recommended at this time due to market uncertainty, and we have made that clear,” according to White House Security Council spokesman John Kirby.
“We’re focused on prices, not barrels,” he told reporters on Monday, adding that the US received a warning before the announcement.
IMPACT
For João Ricardo da Costa Filho, professor of macroeconomics at the Brazilian Institute of Capital Markets São Paulo (Ibmec-SP), all countries will suffer from the rise in oil prices.
“First, you have fuels. With oil becoming more expensive, all its derivatives will become more expensive.”
“This causes you to have a cost increase, and this is a global cost increase. That means that it will be more difficult for all economies to deal with inflation,” he pointed out.
According to him, “all economies, directly or indirectly, are going to suffer, because even the countries that are oil exporters, if the cost of oil, which is quoted on the international market, increases, this all…”
“You are going to have fuel costs, for example, which increases the cost of transporting goods and services.”
“So countries that depend on transportation that use a road network, countries like Brazil, for example, in which you transport a lot by road.”
“When you transport a lot by road, you have a freight cost that is very much associated with the dynamics of fuel.”
“So, Brazil is a country that is directly affected by this, but also indirectly, via the difficulty that the United States will have to reduce inflation,” he explained.
For Costa Filho, “as the US economy is a very large economy, it is a very central economy in the international monetary architecture,” it impacts all the others.
“So, I think most countries will be affected that way. The net balance is going to be negative,” he said.
According to Feldmann, the price increase “will not work out.
For him, “everyone wants to be independent of oil.
They made a ‘very short-term’ bet to get some gain quickly. All right, they managed to raise the price, maybe tomorrow the price will remain high, and then it will fall”.
For Feldmann, “it was too speculative a measure.”
“The world is already vaccinated against this. It doesn’t tend to prosper.”
“I think nobody will talk about this in three or four days.”
“The tendency is for the price to return to normal. It has already happened other times.”
Feldmann added that China would be the most damaged country in a scenario in which the rise in oil prices persisted.
“China is very dependent on oil. It is not a big producer. It has to import.”
“China would have a big impact on prices. So the cost of Chinese products would increase.”
“China would have difficulty placing its products on the international market because they would become more expensive,” he emphasized.
Feldmann pointed out that another country that has little petroleum and that would suffer would be Japan.
As for the European countries, according to him, “the most developed ones would have some impact, not like China and Japan, but they would because of the current situation of the war in Ukraine because they are avoiding buying oil from Russia.”
“That could be a problem because they must look for other sources.”
“They will have to stop buying from OPEC+, or they will be obliged to buy from OPEC+, but then the price will be higher, so maybe Europe will also be affected, but not all European countries.”
For Feldmann, the rise in oil prices would have a “very short-term effect.”
“And then the world gets organized and increases this production that was reduced by the Arabs, somehow.”
“And production returns to normal quickly, and then the price falls again.”
For him, countries “relatively independent of OPEC+,” such as Brazil, Norway, and the United States, could increase oil production.
FORECASTS
For João Ricardo da Costa Filho from Ibmec São Paulo, it is still early to make predictions.
“I think it is still a little early because we need to understand how the other economies will respond to this announcement.”
“What will be the size, for example, of the impact on the economic activity of everything that has been done, in addition to how the economic activity will respond and how China will reopen.”
But the analyst pointed out that:
“There is one thing that the evidence shows, that the literature shows: when you have interest rate increases that happen simultaneously in various economies, the net impact at the end of the story is even more negative for, for example, the GDP, for unemployment, than if you think of each of the economies individually.”
“In other words, if I raise interest rates alone, it impacts my economy.”
“Everybody raising interest rates simultaneously has a bigger impact on my economy.”
“So everybody should have a stronger slowdown.”
“This kind of announcement makes the perspective of deceleration even stronger.”
He continues:
“We still need to know how the economic activity will respond to what monetary policy has been doing.”
“This is a vector. And how China behaves in the coming months will also be important.”
“Certainly, what we expected is that the oil price for this year is higher, but how much higher it will depend on these combinations, of a slowdown on the one hand; China on the other.”
“So, I think it is a little early, but the financial market needs to price it.”
“So, we will see a price increase now, higher, so it is what we call an overshoot – the price will go up too much – and then it will correct.”
“It falls a little until we start to feel these vectors impacting oil price growth dynamics”.
Feldmann, from USP, believes that “the world is more and more prepared to use other energy sources, and this measure ends up being a stimulus for countries to start thinking seriously about abandoning oil.”
“There was a drop in this effort, in these years, from one year to here, because of the war in Ukraine.”
According to the USP professor:
“Ukraine’s war with Russia damaged the European effort to eliminate oil and natural gas.”
“It was a problem to go back to using things that pollute [a lot], like coal.”
“Many European countries that used to use natural gas before, with the absence of natural gas – because it was from Russia – went back to coal, which is very bad.”
“Now I think the world is prepared for this. It is highly focused, especially Europe, on the need to be independent of oil and its derivatives.”
With information from Gazeta do Povo