Macroscope | Opinion: Opec faces tough choice on extending output cuts
If an extension of existing production curbs were to lead to a renewed and sustained spike in the crude price, that could begin to hit the world economy
The Organisation of Petroleum Exporting Countries (OPEC) will convene on May 25 to decide whether to extend the lifespan of production cuts agreed in December. It is a big decision for OPEC and indeed for non-OPEC nations who also signed up to the curbs, and it is not clear-cut.
Higher oil prices, by providing an inflationary impulse to prices, act as a tax on the world’s consumers but currently the International Monetary Fund is positive on the prospects for the global economy, and predicts world growth will rise by 3.5 per cent in 2017, and 3.6 per cent in 2018, compared with last year’s 3.1 per cent increase.
If an extension of the existing production curbs were to lead to a renewed and sustained spike in the price of crude, then that could begin to hit the world economy.
But such an extension would also mean that participating oil producers would have to start making real cuts in output. It could be argued that December’s agreed output curbs correlated with normal seasonal production downturns and so didn’t really represent material financial sacrifices.
Saudi Arabia might have agreed an output cut that began in December, but peak Saudi production normally occurs during its summer months to satisfy domestic demand for crude oil for electricity generation as well as to fulfil its international commitments.
Riyadh would likely have been trimming production to some extent anyway even without the formal agreement made at the end of last year.