OPEC+ Production Cut Should Refocus Washington on American Energy

Dean Foreman
Posted October 7, 2022

With the world struggling under cost pressures associated with the persistent imbalance between global oil demand and supply, OPEC+ announced its sharpest cuts to production since the 2020 pandemic – and in the process sent a clear signal to Washington and other capitals that have recently pressured the group not to cut output in a quest to keep markets supplied and put downward pressure on prices.

The OPEC+ announcement was an unmistakable “no.” 

The production cut of 2.0 million barrels per day (mb/d) from the group’s required output levels set in August, commencing in November, equals 2% of the world’s oil production in August – or about two-and-a-half years’ of average annual production growth over the past decade, per the U.S. Energy Information Administration (EIA).

Importantly, releases of government-controlled or strategic petroleum reserves (SPR) by the U.S. of 1.0 mb/d, as announced at the end of March, and another 0.3 mb/d by other International Energy Agency (IEA) member countries over six months that started in April, are scheduled to end this month.

This means that the OPEC+ cut of 2.0 mb/d, added to the 1.3 mb/d of combined SPR releases that are about to end, will amount to a 3.3 mb/d global oil supply decrease in November – similar in size to the oil shock that IEA considered in April as sanctions on Russia were implemented.  

Unfortunately, the Biden administration in April, through policy and public statements, did not act to support American crude oil production. If it had, American energy could have started affecting the difficult market situation of today, to the benefit of families and businesses across the world.

Instead, the administration repeatedly applied precisely the wrong pressure at exactly the wrong time, and it counterintuitively asked OPEC to take actions that the group asserted were against its self-interests in its statement last month signaling a production downshift.

This latest rebuff from OPEC – following similar rejections of U.S. requests for increasing production rates over recent months – should persuade Washington to choose a course that focuses instead on U.S. energy security – on American energy over foreign energy.

As it is, the administration’s actions have degraded its international credibility while also weakening America’s ability to further increase domestic production in the near-term. 

The administration could still engage with U.S. producers to support domestic output growth next year and beyond, but this requires a new and different policy approach that does not exclude energy sources from America’s present and future portfolio.

Here’s the low-down on the historic OPEC+ production cut. 

First, it is the ninth largest monthly cut on record since 1970, but only the second one ever to occur in a period that has not involved a recession or war, per Bloomberg.

The cartel stated its intentions last month, noting that recent oil price decreases and a dearth of futures trading (“liquidity”) were inconsistent with solid physical demand. Whereas the global natural gas shortage has been obvious, crude oil releases from government-controlled reserves (up to 1.5 mb/d in recent months) together with oil traded as a financial asset (amid diminished growth expectations, repeated interest rate increases, and a strong U.S. dollar) masked what otherwise would have been an oil shortage by EIA estimates.

Consequently, OPEC+ drew a proverbial line in the sand last month. Since then, the U.S. and its allies:

• Continued with further SPR releases;
• And importantly, implemented a G7 Russia oil price cap proposal that effectively forces Russia to discount its barrels even more steeply to sell them – mainly into the one regional market, the Asia Pacific, that OPEC has most wanted to keep serving as long-term customers.

Additionally, OPEC+ could earn more revenue by producing less oil. For example, OPEC produced more than 3.0 mb/d less crude oil in September 2022 than it did in September 2018. Yet, revenues on this crude were 12% higher in September 2022 than they were four years ago, based on OPEC oil prices reported by Bloomberg. 

Therefore, not only has the Biden administration misunderstood OPEC’s economic calculations (effectively, asking the group to prioritize U.S. consumers over its own citizens), but it also has directly moved against OPEC’s economic interests through SPR releases, and the Russia price cap. 

So, of course the administration’s requests to OPEC for increased production were rejected, and the policy choice by the U.S. and its allies has been to lean on U.S. strategic reserves, which are now at their lowest levels since 1984. By comparison, our nation’s oil consumption through the first eight months of 2022 was more than 27% higher than it was in 1984. Since the U.S. is committed to supporting its allies in this critical period through energy exports (which also support American jobs and economic growth), these facts elevate the need for even greater domestic production – sooner rather than later.

Today, OPEC+ has even greater leverage than it had when President Biden traveled to Saudi Arabia in July. Unfortunately, the president continuing to hold out for a favorable production decision this week from OPEC+ was an obvious miscalculation.

Again, the best way to support U.S. energy security in the near-term is to encourage and incentivize American oil production, as well as its enabling related infrastructure.

It is well past time for the administration to take actions that can bring the investment, drilling and production next year – without which IEA, the Kingdom of Saudi Arabia and OPEC have all said would leave global supply short of meeting global demand in 2023, even with recent projections of diminished economic growth expectations.

Historically, even slow economic growth has required more, not less, oil and natural gas. But U.S. crude oil production fell in September to 12.0 mb/d, per EIA – 1 mb/d less than its highest levels in late 2019 and early 2020.

There is still opportunity for American production to be a game-changer for the global market. But the administration, which has been too focused on trying to get needed production from foreign suppliers, must take it by embracing American-made energy – with oil and natural gas at the top.