The Organisation of Petroleum Exporting Countries (OPEC) reached a consensus to cut its production output till 2024.
The oil cartel agreed on a 1.4 million barrel daily cut at its meeting in Vienna with member countries on Sunday, June 4, 2023.
While OPEC’s move may ensure oil price stability for its members over the coming months, it may trigger global shortages in daily oil supply, with resultant higher prices of crude afterwards.
For a post-oil subsidy regime in Nigeria, a surge in global oil prices may lead to an increase in pump prices for Nigerians over the coming months.
As soon as the world’s crude oil output exceeded 99 million barrels per day again in June 2022, oil prices began to fall considerably, meaning less revenue to oil producers like OPEC members.
OPEC member countries currently produce about 40 per cent of the total oil production globally. Thus, its decision will certainly have a significant impact on oil output and prices.
Saudi, one of OPEC’s largest oil producers, agreed to reduce its daily production from 10 million barrels daily to 9 million barrels.
Negotiations are on with other member countries for a further reduction in their oil production. The Saudi group engaged other smaller members to commit to the OPEC oil cut initiative.
While the reduction in the oil production quota by OPEC could maintain oil price stability and sustain high revenue for members, it could lead to a shortage of oil supply.
An analysis of the world’s oil market shows gaps between oil supply and demand. Data from the International Energy Agency (IEA) revealed that world oil production (supply) still needs to meet its market demand, as daily demand exceeded daily supply for 5 of the last 9 quarters.
Global demand for crude oil exceeded supply between the first quarter (Q1) of 2021 and Q1 of 2022.
However, from Q2 2022 to Q1 2023, the average daily output (Supply) exceeded demand for the product.
This excess supply made OPEC take steps to reduce the production quota from its members to keep the price of the product from falling further. The reduction in April 2023, an initial 1 million barrel daily output, was equivalent to 3.7 per cent of global demand.
The world market responded to OPEC’s oil production quota. There was an increase in the price per barrel from $78 to $87.
While OPEC seeks to stabilise the price of oil through the reduction in the oil quota, it is argued that the hidden objective was to generate more revenue for its members. The surge in prices that followed the announcement of a quota cut in April this year supports this hypothesis.
Dataphyte analysis of oil production and prices shows the price reacted significantly to oil output over the last 15 months.
In most periods, a drop in output coincided with further price increases.
A negative correlation of -0.21 between crude oil output and prices showed a linear inverse relationship between prices and production in the 15 months under review.
Thus, a reduction in production output could lead to an increase in the prices of the product. Furthermore, higher product prices indicate a potential increase in revenue for oil producers.
How does this impact Nigerians?
With OPEC’s fixed production and Nigeria’s flexible petrol pump price, people are exposed to direct price fluctuation in the price of Petrol and other products.
An increase in world crude oil prices will directly impact the pump price of PMS in the country.
Prices are more flexible upward than downward, so, the possibility of the pump price coming below N535/litre is very slim.
Yet, the removal of subsidy on petrol (premium motor spirit) in Nigeria comes with the benefit of freeing more funds for development.
The Nigerian Economic Summit Group (NESG) identified some of the returns of subsidy removal to the economy. It noted that the removal of petrol subsidy would free up funds to ease the burden of development spending, the strain on government fiscal space, remove market distortion and inefficiency and eradicate the corruption associated with the subsidy regime.
At open market prices, Nigerians are currently buying fuel at 1.5 per cent of their minimum wage. Meanwhile, less than 16 per cent of the working population is paid according to the minimum wage rate. Many earn less than the minimum wage.
Thus, with OPEC’s drive to sustain high oil prices, the people’s expenditures on fuel are likely to take more proportion of the wages of the Nigerian worker in the future.