Key highlights
- The International Energy Agency has said the latest production cuts by OPEC could further exacerbate inflationary burdens on developing economies.
- The IEA also recognizes the fact that oil prices will rise because of the oil production cuts.
- Nigeria is set to remove fuel subsidies but still has no local refining capacity. This could mean higher inflation rates as the cost burden is passed to end consumers across the board.
The International Energy Agency (IEA) has said that developing countries may bear the brunt of the voluntary crude oil production cuts that were made by the Organization of Petroleum Exporting Countries (OPEC) and their allies on Sunday, April 2. The IEA stated this in a statement released on Monday, April 3.
According to the IEA, the significant new cuts in oil production announced by OPEC+ countries come during a period of heightened uncertainty for global oil markets and concerns about the outlook for the world economy. A part of the IEA statement read:
- “Forecasts by the IEA and other relevant institutions, representing consumers and producers alike, all indicate that global oil markets were already set to tighten in the second half of 2023, with the potential for a substantial supply deficit to emerge.
- “The new OPEC+ cuts risk exacerbating those strains and pushing up oil prices at a time when strong inflationary pressures are hurting vulnerable consumers around the world, especially in emerging and developing economies.”
It is important to note that a voluntary cut does not alter the existing OPEC+ pact which involves cutting 2 million barrels per day and it helped the group in delivering a surprise factor to the market as consensus from all members is not needed for voluntary cuts.
What this means for Nigeria
If oil prices rise, Nigeria will have higher revenues from the oil sector. However, higher oil prices could mean higher petroleum product prices. Nigeria is planning to remove fuel subsidies and the country still has no active refining capacity and the Dangote Refinery is not yet at full capacity.
So, Nigerians who are currently battling a 21.91% inflation rate, will end up paying more for petroleum products that were refined abroad outside the country. This is not just because the subsidy has been removed, but also because marketers will spend more money on transportation costs and pass on the burden to end consumers.
The backstory
Nairametrics had previously reported that Saudi Arabia, United Arab Emirates, Oman, Kazakhstan, Kuwait, Iraq, Russia, Algeria, and Gabon will cut oil production by over a million barrels per day starting in May 2023 until the end of the year.
- On Monday, April 3, the Joint Ministerial Monitoring Committee (JMMC) of the OPEC+ group met and made the new production cuts official, with some of the major producers in OPEC and non-OPEC, including Russia, pledging a total of 1.66 million barrels per day (bpd) of cuts on top of the ones running since November 2022.
- Following the surprise cut, crude oil prices have started to rise, with Brent crude at $85.36 per barrel as of Tuesday, 4:48 am GMT+1.