September 21, 2021

OPEC Agrees to First Oil Production Cut in Eight Years

In September, OPEC announced that it would finalize an oil production cut by the end of November. The announcement was met with much doubt and skepticism, as the cartel seemed anything but a cohesive group capable of rallying around such a decision. However, for the first time in eight years, the coalition of nations has agreed to have certain members cut their oil production.

OPEC has been toying with the idea of a production cut as global oil inventories have mounted, but the talks appeared inconsistent and rather halfhearted, prompting many to believe it was merely optimistic rhetoric. The most recent announcement offers a solid structure as to what specific member-nations will cut production.

The plan is to reduce output by 1.2 million bpd by January, the bulk of which will be shouldered by Saudi Arabia, Iraq, the UAE and Kuwait. Saudia Arabia, OPEC’s largest producer, will cut their output the most with a suggested 486,000 bpd reduction.

OPEC also managed to convince Russia to cut its own output, which is an entirely unprecedented and astounding event in its own right. Russia will attempt to cut production by 300,000 bpd.

It is unusual for a nation outside of OPEC to abide by a production cut agreement, especially given that just a few days before the announcement of the agreement Saudi Arabi walked out on talks with Russia and other non-OPEC members, according to Forbes.

Disagreements frequently occur as to which nations should cut production, as no nation wants to reduce its income earning potential. Unfortunately, a production cut requires that some countries make a sacrifice for the long-term benefit of the industry.

Agreeing to cut production is one matter, but actually following through on it is quite a different consideration. The fickle nature of such an agreement is founded upon the temperamental relationships between many nations with varying interests. The possibility of a swifter recovery of the oil price will hopefully motivate these nations to follow through on the production cuts.

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