Don’t expect OPEC and its allies to come to the rescue of the global economy with a big jump in oil production.
Members of the Organization of the Petroleum Exporting Countries and allied producers such as Russia, collectively known as OPEC+, have produced less oil than their collective quota allows in recent months, reducing global supply and likely driving up prices. A review of the situation by three economists from the Federal Reserve Bank of Dallas found that this “supply shortfall” is due to capacity constraints that are likely to become even tighter as summer approaches.
“There are several reasons why this supply gap has arisen. An important explanation – and one that continues to play a role in 2022 – is the inability of some OPEC+ members to increase production to take advantage of their growing quotas. These countries face capacity constraints for several reasons, including infrastructure problems and the difficulty of attracting enough investment to offset production declines from existing wells,” wrote economists Lutz Kilian, Michael D. Plante and Kunal Patel in an article published on the Dallas. The Fed’s website on Tuesday.
OPEC+ cut production when oil prices crashed in 2020 after the onset of the global pandemic and shutdowns. Last summer, the 23-nation group began unwinding pandemic cuts by collectively adding 400,000 barrels of daily production each month to cartel quotas. Each nation receives a portion of this additional production that corresponds to its contribution to the 2020 reduction. Saudi Arabia, for example, was responsible for 26% of the 2020 reduction, so its quota increases by 104,000 barrels per year. day each month.
Some countries – the Dallas Fed document cites Angola and Nigeria in particular – do not have the capacity to produce as much as their quota would allow. As their quota increases in the coming months, their deficits will increase even more. And the OPEC+ production quota agreement lacks a mechanism for other countries to close the production gap it creates.
Dwindling OPEC+ spare capacity looms large, given expectations of continued strong global demand in 2022 and 2023, concerns that have been heightened by Russia’s invasion of Ukraine.
Assuming the group ramps up production at the same rate as in recent months, only a handful of OPEC+ countries will still have spare capacity by early summer, a number that will shrink in the future. approaching the end of the year. Thus, the supply shortfall is expected to continue to grow this year, with many OPEC+ countries unable to take advantage of the higher production quotas they will receive under the group’s deal.
They note that Saudi Arabia, which also produced less than its quota, does not face capacity limits. Instead, it cut supply to reduce global inventory levels, according to Fed economists.