Regrettable decision to cut oil output could accelerate global inflation

Editorial

15:21 JST, October 8, 2022

Another spike in crude oil prices would spur global inflation. Oil-producing countries should strive for a stable supply to ensure that the global economy does not stall.

During a ministerial-level meeting on Wednesday, the OPEC+ group, which consists of the members of the Organization of the Petroleum Exporting Countries plus nonmembers such as Russia, decided to significantly cut production. They will reportedly reduce oil output by 2 million barrels per day in November. This is equivalent to about 2% of total world demand.

Major central banks around the world, including the U.S. Federal Reserve Board and the European Central Bank, are raising interest rates. Such moves could cool the economy, but priority is being given to curbing inflation, which is hurting people’s living standards.

A major factor in that inflation is the rise in crude oil prices.

After the OPEC+ meeting, the price of benchmark U.S. crude oil futures briefly rose to the $88 level per barrel. Higher oil prices would have a wide-ranging impact on raw material and transportation costs among others.

Greater inflation would force countries to raise interest rates further, which may cause an economic downturn. The decision to cut production is extremely regrettable.

The price of U.S. crude oil futures surged briefly to over $130 per barrel in March following the start of Russia’s invasion of Ukraine. The price then turned downward from June onward and dropped to the $76 level in late September, returning to the level it was at before the invasion of Ukraine.

The oil-producing countries apparently aim to prevent a crash in crude oil prices by throttling back on supply. However, even if production cuts push up revenues in the short term, the oil-producing countries would also be hit hard should inflation plunge the world into a serious recession.

The oil-producing countries are thus also in a position where they need stable global economic growth. In this regard, they should realize anew that they share common interests with consumer countries.

Rising crude oil prices also benefit Moscow, which is trying to raise funds for its war through the sale of crude oil. Some hold a view that the sizable production cuts that have been decided on may be in line with Russia’s wishes.

Consumer countries such as Japan, the United States and European nations have been pushing for an increase in crude oil output. There is concern that the latest decision may deepen a rift with the oil-producing countries.

The White House has released a statement by U.S. President Joe Biden in which he said the decision “will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices.” Japan, the United States and European countries must strengthen cooperation in a broad range of fields with other consumer countries and tenaciously continue dialogue with the oil-producing countries.

At the same time, Japan needs to lower its dependence on crude oil to achieve decarbonization. In addition to utilizing nuclear power and renewable energy, it is essential to focus on research and development of alternative fuels such as hydrogen.

(From The Yomiuri Shimbun, Oct. 8, 2022)