As gas prices continue to fall, the coalition of oil-producing nations led by Saudi Arabia and Russia on Sunday opted against trying to stop the slide with cuts to the world’s oil supply.
Sunday’s move comes after the group unleashed a diplomatic firestorm at its last meeting in October, when it agreed to cut output by 2 million barrels per day. The move drew a sharp rebuke from the White House and a vow from President Biden to inflict “consequences” on Saudi Arabia, the most powerful member of the organization.
But projections that the October cut would send gas prices soaring and generate an infusion of new cash for Russia to bankroll its war on Ukraine proved wrong. Only weeks after the consortium announced that cut, oil prices began dropping. Gasoline now costs less than it has in nine months, with consumers paying lower prices than they did just before Russia launched its invasion.
On Sunday, the average price of a gallon of regular gas in the United States was $3.41, according to AAA, down sharply from its high in June over $5.
The plunging prices of oil and gas are driven in large part by a drop in demand amid fears of a global recession, new covid lockdowns in China, and the effects of soaring interest rates in the United States. Meanwhile, some key U.S. oil refineries that were down for maintenance and repairs have come back online, adding to the world’s fuel supply.
All these forces have put OPEC Plus in a tight spot. The group’s leader, Saudi Arabia, was under pressure from the United States to either boost production or at least block any further cuts in output. But the current market conditions of slumping prices have vindicated the reductions the Saudis championed in October, despite the diplomatic fury they unleashed.
The organization said in a statement Sunday that the October cut “was purely driven by market considerations and recognized in retrospect by the market participants to have been the necessary and the right course of action towards stabilizing global oil market.”
The next OPEC Plus meeting to reconsider output has been set for June. But the group said in its statement that schedule could change, and it could “meet at any time and take immediate additional measures to address market developments and support the balance of the oil market and its stability if necessary.”
In the backdrop of internal OPEC Plus deliberations this weekend was an agreement reached Friday by Ukraine’s allies to impose a cap on the price of Russian oil. The cap, set by the Group of Seven nations and Australia, is meant to keep Russian oil flowing into some global markets but limit the amount of profit the Kremlin can capture to fund its war machine.
Countries are implementing the price cap just as a European ban on importing Russian oil kicks in on Monday. Because that ban doesn’t apply to other parts of the world that are still buying from Russia, the price cap is seen as an additional tool to limit Russia’s oil revenue. Europe and the United States will enforce the measure by using their significant control over petroleum shipping carriers and the companies that provide them insurance.
OPEC Plus was closely watching European deliberations over the price cap, as it poses a direct threat to its control over oil markets. The cap essentially works as a “buyers’ cartel” in which countries band together to influence the price that oil producers can charge.
“An institutionalized buyers’ cartel could threaten to erode OPEC+ price-setting power,” the research firm ClearView Energy Partners wrote in a note to clients late last week.
Agreement on the cap proved a difficult balancing act, as some European nations, like Germany, feared that setting the price too low would prompt Russia to retaliate by cutting off supplies, sending oil prices soaring worldwide. Other nations, especially in Eastern Europe, wanted a much lower price as a way to inflict pain on Russia.
But countries ultimately were able to agree upon $60 per barrel, which is roughly the amount Russia is able to sell its oil for without a cap. That decision likely eased concerns by OPEC Plus members that the cap would undercut their influence over oil markets.