On Sunday, OPEC+, which stands for Organization of Petroleum Exporting Countries (OPEC) and its allies, announced a production cut of about 1 million barrels of crude oil per day. Now the question remains, will rising oil prices due to OPEC+ output cut affect inflation in the West?
This cut makes up approximately 1% of global oil production. As some of the world’s largest oil producers have announced output cuts, oil prices are expected to rise.
The Saudi-led decision will go into force next month, reducing oil production by more than 1 million barrels per day.
Everything else being equal, reducing the supply of oil results in a rise in its price, which explains why a barrel of Brent Crude – one of the market’s benchmarks – reached about $86 per barrel.
Before, oil prices were in the $60-$70 bandwidth. OPEC+ stated that its decision to cut oil production was made to ensure oil market stability, which entails setting a floor beneath oil prices of around $80 per barrel.
This is said to be a precautionary action by OPEC+ in anticipation of an economic downturn and possibly recession. However, as per experts, there seem to be two main causes behind this decision spearheaded by Saudi Arabia and OPEC+.
One of the main reasons is the concerns about the banking crisis stemming from Silicon Valley Bank’s failure and problems with banks in the United States and Europe.
And the second reason is China’s reopening after harsh shutdowns due to the Pandemic and what it would entail for the global economy.
Oil company stock prices like Exxon and Chevron rose on Monday as a reaction to the OPEC+ announcement. What transpired was not well received in the United States.
It’s worth mentioning that Saudi Arabia and Russia, both members of OPEC+, aren’t exactly in love with the United States right now, which means they might not care if USA isn’t delighted about the decision.
Now the question is, will rising oil prices due to OPEC+ output cut affect inflation in the West? While the United States, the United Kingdom, and the European Union all struggle to decrease the increasing pressure on the cost of living, this decision may be a harbinger of bad news for growing inflation.
Although Western countries are less reliant on oil, higher oil prices can increase the cost of manufacturing and transportation, as well as limit consumer purchasing power.
This can also affect the interest rates in the longer run. Higher oil prices will probably cause the Federal Reserve, the Bank of England, and the European Central Bank to be more cautious.
If OPEC+ is successful in permanently raising oil prices, interest rates will remain higher for a longer period. This increases the likelihood of a recession.
In general, crude oil has a greater impact on Producer Price Indexes (PPIs) than Consumer Price Indexes (CPIs), implying that rising crude oil prices hurt merchants and companies more than consumers.
Source: OPEC
