LONDON: A decision by the Opec+ oil producers’ group last week to cut output has driven up prices and could push the global economy into recession, the International Energy Agency warned on Thursday.
“The relentless deterioration of the economy and higher prices sparked by an Opec+ plan to cut supply are slowing world oil demand,” said the Paris-based agency, which includes the United States and other top consumer countries.
“With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession.”
The warning from the agency highlights a rift with Saudi Arabia, the world’s top oil exporter and the de facto leader of Opec+, which also includes Russia and a handful of other countries not part of the original Organization of Petroleum Exporting Countries.
While reduced output should push up prices, futures contracts in world markets have been holding steady, with Brent crude, the European benchmark, trading around $92 a barrel, and West Texas Intermediate at $87. Many traders have already priced in the potential impact of reduced oil demand as the global economy slows.
US President Joe Biden vowed unspecified “consequences” for relations with Saudi Arabia after the Opec+ move, but Riyadh rejected criticism and said the move was not political and aimed at balancing the market and curbing volatility.
Actual supply losses will likely be around 1 million barrels per day (bpd) and not the 2 million bpd announced by the Opec+ bloc, the IEA said. Global oil demand is about 100 million bpd, so the cuts represent 1-2% of the world total.
Capacity constraints plaguing other Opec members mean the Saudi Arabia and the United Arab Emirates will account for most of the reductions, the IEA said, while new G7 and European Union sanctions on Russia could further tighten global supply.
The EU this month endorsed a plan by the G7 club of wealthy nations to impose a cap on prices for Russian oil exports, a complex set of new global sanctions aimed at depriving Moscow of revenue for its invasion of Ukraine.
Any big disruption to Russian oil flows even to non-EU and non-G7 buyers could raise prices worldwide, however, and heap economic pain on citizens of the sanctioning countries already grappling with high inflation and costs of living.