It’s too early to know what OPEC’s production cuts mean

Hey everybody, Peter Zion here coming to you from my old stomping grounds, Austin, Texas.

The big news of October 5 is that OPEC has announced it is planning on reducing output by 2 million barrels a day, despite the fact that there’s a war raging and a major energy producer and energy prices writ large are really high and global inflation is high. 

Now, some people are, I shouldn’t say some people, a lot of people are, of course, latching this on to whatever their favorite drums is to beat at the moment. Some people on Twitter have said that, you know, of course they’re doing this to stick it to quote “my boy Biden” and you know, my boy Biden, ewww, no. 

Far more important, far more important is that OPEC is nowhere near their production quota. In fact, as recently as August, they were about 2.8 million barrels a day below it. So if they cut their quota by 2 million barrels a day, that actually means they might increase output. So you know, number one, let’s wait to see what happens here.

The problem here is if you’re outside of the Persian Gulf, OPEC members – so Kuwait, United Arab Emirates and Saudi Arabia – everyone else has just been in this investment bomb for over a decade. In fact, since 2014, total investment to all oil and all natural gas globally, government, state company, private companies doesn’t matter. The total is down by about two thirds. 

And the non-Gulf OPEC countries are no exception. Places like Gabon and Nigeria and Venezuela are just borderline incompetent when it comes to maintaining their own energy infrastructure anyway, so they’re completely dependent on internal investment. And yet they think they have checks that they need to write. 

So they don’t provide the investors with particularly great terms. And so if you’re one of those investors and cash is limited, you try to put your money elsewhere where it’s going to be more productive with a more reliable partner.

And that manifests as lower production and a lot of OPEC states to the tune of apparently 2.8 million barrels per day. Now, in the last few weeks, about a fresh million has come online, mostly from Libya and Nigeria, because a certain confluence of events have allowed them to increase input, or output, in the short term. But don’t expect that to drop. Both of them are very close to record low outputs at the moment, and they’ll probably be back within a few months. It’s just kind of how it shakes out with these folks. 

Anyway, bottom line is before you ascribe any sort of motivation to OPEC, you know, the favorite one being that they’re trying to stick it to Biden, because Biden is green and hasn’t been exactly kind to the Saudis. There might be something to that, but we’re not there yet. 

Don’t ever, in this line of work, listen to what people say, watch what they do, especially when you’re talking about folks in the Middle East where suicide bombs are often perceived as a legitimate form of political discourse. 

The rules are different over there. And we need to keep that in mind before we jump to any conclusions. So wait, watch, let’s see what the Saudis do over the course of the next few weeks with their actual oil exports. That’ll tell us everything we need to know about what it is they’re trying to actually achieve. Okay, that’s it for me. Until next time.