OPEC decision to cut oil flow push world to edge of recession
The International Monetary Fund reduced its forecast for global economic growth in 2023 to 2.7 percent, which is the lowest growth estimate since 2001.
Following OPEC’s agreement to reduce oil production starting in the following month, analysts have warned that the globe has been brought dangerously close to recession.
The Organization of the Petroleum Exporting Countries (OPEC) and their allies, including Russia, decided earlier this month to reduce output by two million barrels per day (bpd) right before the busiest time of the year.
The Saudi-led international oil cartel was accused by the US of collaborating with Russia to raise oil prices.
Following this revelation, the International Energy Agency (IEA) issued a warning that the drop in oil production could cause a global economic downturn because rising crude oil prices would worsen global energy security issues.
The International Energy Agency (IEA), which provides energy policy advice to nations such as the US, UK, and Germany, cautioned that the planned cuts have already hurt world oil consumption in a monthly report.
“The Opec+ bloc’s plan to sharply curtail oil supplies to the market has derailed the growth trajectory of oil supply through the remainder of this year and the next, with the resulting higher price levels exacerbating market volatility and heightening energy security concerns,” IEA wrote.
“With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession,” it added.
The IEA’s warning follows the IMF’s last-week reduction of its 2023 global economic growth prognosis to 2.7 percent, the lowest year-ahead growth forecast since 2001.
According to IEA, oil demand for the final three months of 2022 would now decline by 340,000 bpd compared to last year, with expectations for 2023 showing a precipitous decline in demand growth to just 470,000 bpd from 17 million bpd.
According to Professor Adam Pankratz of the Sauder School of Business at the University of British Columbia, OPEC’s decision would increase the price of oil and make it a “scarce commodity”.
“That starts creating larger problems in terms of environmental policy for Europe. Should you be drilling for your oil? I don’t know, and they probably won’t, at least initially. But that is a realistic thing to ask”. The “huge decrease” in Opec+ oil production will “sharply reduce” countries’ capacity to replenish their reserves next year, according to the IEA, even after oil consumption declines,” he said.
The cut announced on Wednesday, according to a RAC spokeswoman, will “inevitably” result in higher oil prices, driving up the wholesale price of petrol.
The key, according to Simon Williams, is “when and how much retailers choose to pass these extra prices on at their forecourts.”
The reduction announced by OPEC and its partners is the largest by the group since the Covid 19 pandemic’s peak in 2020.
The bloc’s leader, Saudi Arabia, has defended the output reductions, saying that they are necessary to prevent an oil price crash that would harm long-term supply.
