Oil Price Rise Following OPEC+ Production Cut Announcement Underscores Volatility of Fossil Fuels

Oil prices rose by more than six percent on Monday after Saudi Arabia and other oil producing nations announced a surprise production cut of 1.15 million barrels per day from May through December. 

The announcement, coming a little more than a year after Russia’s invasion of Ukraine sent energy prices skyrocketing, is another example of how relying on fossil fuels leads to a volatile energy market. 

“The inherent volatility of fossil fuels and the ways they expose consumers to geopolitical and climate risks drive consumer price volatility at both the gasoline pump and in household utility costs, contributing significantly to overall inflation,” Lauren Melodia and Kristina Karlsson wrote in an issue brief published by the Roosevelt Institute last May. 

In this case, Saudi Arabia’s energy ministry announced that it, along with some nations that belong to the Organization of the Petroleum Exporting Countries (OPEC) and some oil producing nations that do not, was curbing production as a “precautionary measure” to make sure the oil market stayed stable, The Independent reported. Saudi Arabia is cutting production by 500,000 barrels per day, Iraq by 211,000 barrels per day, the United Arab Emirates by 144,000, Kuwait by 128,000, Kazakhstan by 78,000, Algeria by 48,000 and Oman by 40,000. 

In response, the price of Brent crude futures and U.S. West Texas Intermediate (WTI) crude futures rose by more than six percent, Reuters reported. Brent crude futures nearly rose as high as $86 per barrel, according to The Guardian.

“The increase in oil prices following Sunday’s announcement could potentially put more pressure on inflation — worsening the cost-of-living crisis and raising the risk of recession,” Sameer Hashmi, the BBC’s Middle East business correspondent, wrote. 

The energy price jump caused by Russia’s invasion of Ukraine helped trigger current inflation, and this decision could boost the income of oil-rich Russia, fueling the war, The Independent noted. However, it is likely that Saudi Arabia acted out of more domestic concerns, as the country is hoping higher oil prices will help fund Crown Prince Mohammed bin Salman’s Vision 2030 plan, Rice University Gulf expert Kristian Coates Ulrichsen told The Independent.

“This domestic interest takes precedence in Saudi decision-making over relationships with international partners and is likely to remain a point of friction in U.S.-Saudi relations for the foreseeable future, even without taking into account the Russian dimension,” he said.

President Joe Biden had previously opposed OPEC and other nations’ decision in October of 2022 to limit production, saying he was “disappointed by the short-sighted decision.” 

Monday’s announcement could increase U.S. gas prices — which now average $3.50 per gallon — by as little as 10 cents or as much as 50 cents or more, The Washington Post noted. In the short term, there is not much the U.S. can do, because any new drilling leases would not have an immediate effect on supply and would put the stability of the global climate at even greater risk. The most recent Intergovernmental Panel on Climate Change report found that even existing fossil fuel infrastructure puts the world on track for more than 1.5 degrees Celsius of warming beyond pre-industrial levels.

However, in the longer term, a transition to renewable energy can stave off both energy market and climate volatility. 

“[I]n order for the federal government to meet its commitment to achieve price stability — which Congress empowered the Federal Reserve to monitor and manage — it must facilitate a rapid transition away from fossil fuels and toward the renewable sector.” Melodia and Karlsson wrote.