A coalition of oil-producing nations—OPEC+—just dropped some game-changing news. They’ve promised to raise their oil production by 411,000 barrels per day beginning in May. US-China relations are continuing to deteriorate. Policy has raised concerns about international economic contagion and loss of oil demand. The Organization of the Petroleum Exporting Countries (OPEC) is made up of 12 member countries. When they work in concert, they dramatically shape global oil prices by determining production quotas as a bloc.
The OPEC+ group, which includes Russia and other non-OPEC oil producers, has biannual meetings. This coalition of sorts involves ten non-OPEC members, including Russia, who collaborate on production levels and quotas. The current increase in production is intended to address growing demand while navigating the complexities of international relations and economic recovery from the pandemic. Experts are cautioning that ramping up domestic production can actually do the opposite and force more oil consumption.
OPEC’s Role in the Global Oil Market
OPEC remains powerful enough to directly affect the global oil market by setting the price and providing desired supply levels. As a group, OPEC nations hold enough leverage—much more than any other single country—to impact the oil market’s delicate supply-demand balance. Through establishing production quotas, OPEC can control the supply side of the equation by constraining production to push up prices or increasing production to satisfy demand.
The group’s influence spreads far beyond its 12 member countries. OPEC+ now comprises 23 additional non-OPEC nations, with Russia being the largest and most controversial among them. The timing of the announcement is noteworthy, as this expanded coalition enhances OPEC’s ability to coordinate more effectively with non-member oil producers. Therefore, it fortifies OPEC’s grip in the global market.
OPEC’s semi-annual meetings are high-stakes theater, but crucial moments in the organization’s influence where member states bargain over production levels. These meetings are in keeping with the group’s commitment to striking a balance between supply and demand. They are diligent about achieving some semblance of stability within the oil market.
Recent Decisions and Their Implications
The decision to boost production by 411,000 bpd in May is a rubicon-crossing signal that the OPEC+ alliance intends to keep tight. As our global economies have begun to return to activity after the COVID-19 pandemic, demand for oil has been strong, leading OPEC+ to adjust its cuts. This increase could produce some unintended consequences.
In the past, when OPEC boosts production, it can be enough to slice through global demand, limiting oil use. This paradox occurs due to the fact that when supply increases, prices tend to fall, thus deterring new investment in oil exploration and production. As a result, although OPEC wants to avoid being a deterrent to current demand, it needs to be cautious about the long-term impact of its actions.
When OPEC chooses to cut production quotas, it has an immediate ability to harden the supply of oil in the marketplace. This strategy often results in increased costs, burdening consumers and businesses while benefiting member countries. It will burden consumers and businesses that rely on affordable, abundant energy.
The Impact of US-China Tensions
Heightened U.S.-China tensions make OPEC’s calculations even trickier. These geopolitical concerns loom large over the group’s options. We show how trade disputes and geopolitical conflicts could deal an outsized blow to global economic stability and oil demand. They are two of the biggest consumers of oil. Even a short-term disruption in their relationship or supply could send market prices into chaos.
There’s a reason why analysts and market participants alike hang on OPEC’s every move. They understand that the organization’s decisions can raise or lower global oil prices by millions of dollars. The organization’s capacity to pivot in response to shifting geopolitical landscapes will be key in determining whether it can continue to exert its influence over the market.
Specifically, OPEC+ plans to boost its production. Stakeholders from President Biden on down are closely monitoring the developing geopolitical conflicts and their likely effects on oil consumption around the world. Here’s why the coalition’s recent courageous move was so audacious. This step further demonstrates their leadership in addressing a difficult fiscal landscape and addressing the needs of a rebounding global economy.