OPEC Plus oil production cut fuels fears of economic recession in Europe
While initial reactions were more subdued in the European Union, the output cut comes as the 27-nation bloc braces for a marked slowdown in economic growth linked to rising energy prices. EU industrial powerhouse Germany reported a worse-than-expected drop in manufacturing orders Thursday, raising fears of a recession.
OPEC and its allies decide to cut oil production, prompting a fiery response from the White House
Simone Tagliapietra, senior researcher at Brussels-based economic think tank Bruegel, said the cut in output “will support inflation and make Europe’s energy crisis even more complicated”.
It also makes the Group of Seven (G-7) Russian oil price cap, which has just been given the green light by EU countries, “less impactful”, he said.
While the production cut is expected to boost prices at European petrol stations, the extent of the rise was not immediately clear. Oil prices could still top $100 a barrel, analysts said. Even before the announcement of the production cut, European business groups feared that companies would replace increasingly expensive natural gas with oil, which could drive up prices at petrol stations.
Over the summer, many European countries tried to protect consumers from rising gasoline prices through subsidies and tax breaks. But a similar intervention to tackle soaring electricity and natural gas prices this fall has strained budgets, leaving some countries with little leeway to respond to Wednesday’s announcement. Germany’s increasingly precarious economic situation could also hamper stronger EU action.
These factors could weigh heavily this winter, heightening the possibility of natural gas and electricity shortages, blackouts and shrinking profit margins for European companies. The concerns did not immediately trickle down to European markets on Thursday, however. Germany’s flagship index, the Dax, and the European Stoxx 600 initially made small gains. Oil held near $88 a barrel on Thursday, according to Bloomberg.
In European capitals, however, the production cut could pose immediate geopolitical challenges.
Just hours before the OPEC Plus decision, EU member states on Wednesday agreed to their own cap on the price of Russian oil as part of the bloc’s eighth round of sanctions over the war in Ukraine.
The idea behind the cap is to set the price of Russian oil above the cost of production, but below the market price, maintaining oil trade while limiting Russian revenue.
Under the sanctions, EU and G-7 officials will meet to set the price, adjusting the level in response to market conditions, EU officials said. Member States will have to approve the decision unanimously.
To ensure compliance, the sanctions require companies involved in transporting Russian oil, including insurers and shipowners, to ensure that their cargo is not sold above the cap.
The US Treasury, which has been pushing for the measure for months, says the price cap “strongly” reduce Russian income.
But some energy experts have raised questions about whether it will work as expected. Russia could decide to keep its oil off the market rather than selling at the price cap, which would further reduce supply. And even if Russia continues to sell, a cap will only be effective if there is buy-in from all customers, including India and China, experts said.
But as “global oil prices will rise with this OPEC Plus decision, some countries may have more incentive to opt for discounted Russian crude,” Tagliapietra wrote. It is possible that OPEC Plus news will make Beijing and Delhi less likely to meet the price cap.
In the medium term, these setbacks could test Europe’s resolve to support Ukraine. The planned reduction in oil production “shows that the energy crisis in Europe threatens to escalate into a global price war”, according to a German economic newspaper. Handelsblatt warned in an analysis, saying the move pits Europe and the United States against OPEC, its partners and big oil importers like China and India.
For President Biden and European leaders who have visited Saudi Arabia this year as part of extraordinary efforts to push for increased oil production, Wednesday’s rebuke of OPEC Plus also prompted uncomfortable questions about the diplomatic compromises they were willing to make – and the results they have to show for it.
Biden visited Saudi leaders during a trip to Jeddah this summer and punched out Crown Prince Mohammed bin Salman, while French President Emmanuel Macron then had a long handshake with Mohammed in Paris. In Greece, a senior member of the government publicly expressed his admiration for the “leadership” and “vision” of the crown prince. And German Chancellor Olaf Scholz visited the kingdom only a few days ago.
Saudi Crown Prince engages in long handshake with Macron during rehab tour
Four years after the murder of journalist Jamal Khashoggi, Western outreach seems to have largely rehabilitated the crown prince.
But for Europe and the United States, the efforts have “remained in vain”, according to the German Handelsblatt.
“As of today, it’s clear to insiders: Saudi Arabia is on the side of Kremlin leader Vladimir Putin,” the newspaper wrote.
Rauhala reported from Brussels. Jeff Stein, Rachel Lerman and John Hudson contributed to this report.