Gas Price Update: OPEC’s Latest Decision on Oil Production and Your Wallet
After prices hit a six-year high at the beginning of July, consumers might finally be receiving a break on oil prices.
The OPEC Plus countries reached an agreement on July 19 to begin pumping more oil starting next month. The new agreement resolved a dispute between the United Arab Emirates and Saudi Arabia that had blocked an agreement earlier this month and caused gas prices to spike temporarily.
According to the U.S. Energy Information Administration, OPEC member countries and OPEC Plus countries produce about 40% of the world’s crude oil while its oil exports represent about 60% of the total petroleum traded all over the world. They added that, because of this market share, OPEC’s actions can and do influence international oil prices, particularly from Saudia Arabia which is the largest OPEC producer.
A surplus in April of 2020 led OPEC countries to decrease oil production. That, combined with a sharp decline in demand due to the pandemic, is when OPEC countries decided to curb oil in favor of emptying surpluses and maintaining price levels before a sharp fall-off. Demand for oil products, specifically as airlines were forced to largely shut down, steeply fell and an agreement was put in place to limit production.
Their efforts paid off as crude oil has returned to pre-pandemic price levels. The OPEC restrictions have contributed to skyrocketing gas prices, but a new agreement in place to pick oil production back up could change things.
Under the new deal, contributing countries will increase output each month by 400,000 barrels a day beginning next month. Overall, this will add roughly 2% to the world oil supply by the end of 2021, the New York Times reported.
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Increased oil production can lead to an easing in gas prices, but there is still a looming contender for keeping prices elevated — inflation. Gas prices have long been a carefully observed element for inflationary indicators. As energy and oil prices rise, so does inflation. In normal market conditions, the expansion of oil production could lead to a dip in oil prices, but this year’s inflation landscape looks a little bit different.
Although oil production will increase, the ongoing pandemic and persistent supply chain disruptions, along with port blockages that have contributed to steadily increasing prices, could put a halt to downward gas price expectations. This, combined with the looming hurricane season that annually threatens oil drilling and refining on the Gulf coast, could see sustained prices at the pump for at least another couple of months before increased production tapers off inflationary pressures.
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