Saudi Arabia has announced that it will reduce its oil exports to the global economy by one million barrels per day (bpd) as the OPEC+ alliance confronts falling oil prices and an impending supply glut.
The kingdom announced on Sunday that it would implement these production cuts in July to support the falling price of petroleum oil after two previous production cuts by OPEC+ members had failed to increase prices.
OPEC+, which consists of the Organization of the Petroleum Exporting Countries and its allies led by Russia, reached an agreement on output policy after seven hours of discussions at its headquarters in Vienna and agreed to extend earlier supply cuts through the end of 2024 by an additional 1.4 million barrels per day.
The new set of production targets is "much more transparent and fair," Saudi Energy Minister Abdulaziz bin Salman said at a news conference.
He added that Riyadh could extend the limit beyond July if necessary.
However, many of these reductions will be fictitious, as the group lowered the targets for Russia, Nigeria, and Angola to match their actual production levels.
In contrast, the United Arab Emirates was permitted to increase its production.
OPEC+ produces approximately 40% of the world's crude, so its policy decisions can significantly affect oil prices.
It has already implemented a 2 million bpd reduction agreed upon last year, accounting for 2 percent of global demand.
In April, it agreed to a voluntary limit of 1.6 million bpd, which went into effect in May and will continue until the end of 2023.
However, these adjustments did little to increase oil prices sustainably.
International standard Brent crude reached an all-time high of $87 per barrel but has since surrendered its post-cut gains and has been hovering below $75 per barrel recently. US crude has dropped below $70 per barrel.
The decline in oil prices has made it cheaper for U.S. motorists to fill up their containers and has provided relief from inflation for consumers worldwide.
Inflation in the twenty European countries that use the euro has reached its lowest level since before Russia's invasion of Ukraine, partly thanks to falling energy prices.
The Saudis' belief that a further cut was necessary highlights the uncertain prognosis for fuel demand in the coming months.
Concerns exist regarding economic weakness in the United States and Europe, while China's rebound from COVID-19 restrictions has been less robust than anticipated.
The West has accused OPEC of manipulating oil prices and undermining the global economy through high energy prices. In addition, the West has accused OPEC of siding with Russia despite Western sanctions imposed in response to Moscow's invasion of Ukraine.
In response, OPEC insiders have stated that the West's money-printing over the past decade has fueled inflation and compelled oil-producing nations to take action to preserve the value of their primary export.
Most Russian oil exports have been purchased by Asian nations such as China and India, who have refused to join Western sanctions against Russia.
It is conceivable that the most recent production cut will increase oil and gasoline prices. However, it is uncertain when the global economy will resume its thirst for petroleum for transportation and industry.
The Saudis require sustained high oil revenues to finance ambitious development initiatives designed to diversify the Saudi economy away from oil.
The International Monetary Fund estimates that the kingdom requires $80.90 per barrel to satisfy its planned spending obligations, which include the $500 billion Neom desert city project.
While oil producers require revenue to finance state budgets, they must also consider the effect of higher prices on oil-consuming nations.
Inflation can be fueled by excessively high oil prices, eroding consumer purchasing power, and pressuring central banks such as the Federal Reserve to increase interest rates further.
Higher rates target inflation, but they can slow economic development by making it more difficult to obtain credit for purchases or business investments.