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Western governments are furious after OPEC+ decided last week to cut oil production by the largest amount since the pandemic began. They have good reason to be alarmed: The cartel’s actions could send the global economy over the edge, the International Energy Agency warns.
“With relentless inflationary pressures and interest rate hikes taking their toll, higher oil prices could be the turning point for a global economy already teetering on the brink of recession,” the Paris-based agency said in its monthly oil market report on Thursday.
The IEA cut its forecast for next year’s global oil demand growth by more than 20%, citing further downgrades of global growth expectations by major institutions. The International Monetary Fund said this week that 2023 will “feel like a recession” for many people as it cut its GDP growth forecast to 2.7% from an earlier forecast of 3.2%.
Despite significantly weaker demand growth Supply cuts by Saudi Arabia and other major oil producers are expected to severely reduce global oil supplies and keep prices high.
“The massive cut in OPEC+ oil supply increases risks to energy security worldwide,” the IEA said.
The cartel’s decision to cut oil production by 2 million barrels a day, equivalent to about 2% of global oil demand, has put Saudi Arabia on a collision course with the White House, which has accused the kingdom of aligning itself with OPEC+ member Russia.
US President Joe Biden told CNN’s Jake Tapper this week that Washington must now “reconsider” its relationship with Riyadh following the cut that threatens to send gas prices skyrocketing in America ahead of the midterm elections.
Saudi Foreign Minister Adel al-Jubeir said the cut was intended to stabilize markets. “We’re trying to make sure we don’t have erratic price swings,” al-Jubeir, one of Saudi Arabia’s top diplomats, told CNN’s Becky Anderson on Wednesday.
According to the IEA, the actual production cut will be closer to 1 million barrels per day as most OPEC+ members – including Russia – fall short of previous production targets.
Still, the decision to cut supply pushed Brent crude higher and flirted with $100 a barrel again. The global benchmark traded just below $93 on Thursday, down about 11% from the recent low.
Typically, higher oil prices prompt action from non-OPEC producers, particularly US shale companies. But they are suffering from supply chain disruptions and cost inflation, and have yet to announce major investments in production, according to the IEA.
Another factor contributing to underinvestment: the 2020 oil bust. The early days of the pandemic drove Brent crude up to $20 a barrel – while US oil prices briefly turned negative – prompting a spate of bankruptcies across the country oil and gas industry.
“This casts doubt on suggestions that higher prices will inevitably balance the market with additional supply,” she added. Supply growth is expected to “slow down significantly” in 2023, although it will still hit a record 100.6 million barrels per day. Global oil demand is expected to average 101.3 million barrels a day over the next year, the IEA said.
— Joshua Berlinger and Chris Isidore contributed to this report.
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