Current developments in the global economy clearly do not favor the OPEC+ oil cartel. The group’s April decision to reduce production by 1.66 million barrels per day (mbpd) beginning in May 2023 did not result in a long-term price increase. Nevertheless, during their next meeting, on June 4, OPEC+ member countries not only decided to extend the current production cuts until the end of 2024 but also made adjustments to their production quota calculations for the next year so that the nominal level of the cartel’s collective production maximally corresponded to its real capacities. In 2024, this will nominally decrease output by some 1.4 mbpd, although these volumes are already absent from the market. On top of that, market watchers were caught unprepared by Saudi Arabia’s decision to voluntarily reduce its July production by an additional 1 mbpd, a decision analysts have characterized as “risky,” irrelative to further developments.

“Negative” scenario

The cartel’s main bet is that the world economy will still be able to avoid a recession and, together with China’s active growth, ensure a shortage of oil on the market in the second half of 2023. In other words, oil producers need to make short sacrifices now in order to accelerate the onset of the necessary supply deficit, to push oil prices up by the end of 2023. These expectations are somewhat at odds with the current realities (signs of economic contraction in Europe, slower than expected development of China’s production sector, etc.), forcing even the cartel participants to admit that their supply and demand expectations will not necessarily come true. Moreover, for now, demand factors pulling down oil prices are playing a decisive role in determining the oil market situation, whereas supply factors are not effective at pushing prices up. If OPEC+’s bet on a market deficit by 2024 does not pan out, Saudi Arabia and its cartel partners might pay for this mistake by losing market share to other producers: Experts are already raising the prospect of a revival of the shale oil industry and an influx of non-OPEC+ oil.

This is not to say that the losses of OPEC+ members can be measured only in terms of market share: Given the central role the oil sector plays in their economies, artificial production cuts inevitably worsen their macroeconomic growth indicators and create budgetary issues. The International Monetary Fund (IMF) has already revised its expectations of Saudi Arabia’s economic growth in 2023 from 3.1% down to 2.1% (against 8.7% in 2022). Moreover, even harsher estimates have been put forward: According to estimates by Abu Dhabi Commercial Bank PJSC chief economist Monica Malik, the Saudi “economy will probably grow 0.7% in 2023 instead of 1%.”

“Positive” scenario

OPEC+ and the International Energy Agency (IEA) forecast oil market demand growth of more than 2 mbpd that subsequently causes a market supply deficit during the second half of 2023. But even if this prediction comes true, the cartel will still have problems — of a political nature. Since OPEC+ members will have real capacities to cover this deficit, the cartel will be subjected to serious pressure from the consumer side, including, in particular, the United States. Many American lawmakers have not forgotten about the NOPEC bill, which, if adopted, would make OPEC+ producers subject to prosecution by the U.S. authorities for manipulating oil prices. The U.S. House of Representatives Committee on the Judiciary again discussed options to act against OPEC not so long ago — in May 2023 — despite the fact that OPEC+’s attempts to support high oil prices this year through unprecedented production cuts had largely failed. Over the long term, the artificial production cuts by OPEC+, coupled with high global oil prices, may even accelerate many Western consumer countries’ transition toward green energy sources. As noted by Bloomberg columnist, David Fickling, “perhaps this time when the Saudis open the taps, the world will no longer want what they’re selling.”

However, Saudi Arabia and OPEC+ do not have much of an alternative to their current strategy.

No malevolent intentions

By highlighting the very fact of Saudi Arabia’s attempts to increase oil prices, rather than focusing on the underlying reasons for such behavior, analysts all too often end up presenting the cartel and its leaders as villains whose only purported goal is enrichment. But in actuality, OPEC+’s actions tend to be mostly reactive and aimed at protecting the wellbeing of its members: For almost a year now, global oil prices have been falling and the organization was compelled to act, trying to stop them from declining further (see Chart 1).

Source: OPEC

Moreover, in the case of some oil-producing Arab Gulf monarchies (including, first of all, Saudi Arabia), the current price level has either come close to or dropped below their state budget break-even point (see Chart 2). This, in turn, calls into question the future of their ambitious economic transformation programs, adopted in anticipation of the realities created by the ongoing energy transition away from hydrocarbons.

Source: Bloomberg

In order to successfully integrate into the new “post-oil” economic system while ensuring extended demand for hydrocarbon resources, traditional oil producers need to start implementing ambitious and complex economic programs that include measures aimed at the decarbonization of oil, gas, and petrochemical production, the diversification of their own economies, the development of sustainable energy sources, and a reconstruction of their own energy systems. All of these objectives require substantial funds, which the governments assumed would be generated by oil incomes. Yet the current situation cannot guarantee their steady flow.

Under these circumstances, for the Arab Gulf leaders of OPEC+ and, above all, Saudi Arabia, the struggle to achieve a stable market and high prices is not motivated by a pursuit of excess profit but by concerns over these countries’ future place in the global economy.

Meeting a brave new world

Existing capacities allow the cartel to attempt to play the role of a swing producer (taking into account the May reduction, OPEC+ can increase its production by up to 3.5-4 mbpd). But the center of decision-making within the group has obviously shifted toward Saudi Arabia and, partially, the United Arab Emirates and Kuwait. They have the ability to regulate production volumes and closely implement the decisions taken on production cuts. The remaining players, meanwhile, either suffer from political factors limiting their participation in the activities of the cartel (such as Iran, Libya, and Venezuela) or face the consequences of years of underinvestment in their oil sectors and, thus, physically cannot maintain even existing production quotas. Russia, although it announced a voluntary production reduction of 500,000 barrels per day, remains a wild card, with unclear levels of oil output (in April 2023, the Russian authorities suspended the publication of official data on oil, gas, and condensate production ostensibly until April 2024), but it can hardly afford to regulate its production rates as easily as Saudi Arabia. In other words, the era of various competing camps within OPEC and OPEC+ is, for now, a thing of the past. The cartel’s decisions are largely shaped by its three leaders (albeit not without some contradictions between them), which paid for their leading role by shouldering the bulk of the oil production cuts in recent years.

Under these circumstances, the cartel’s behavior increasingly reflects the interests solely of the Gulf producers. Thus, if in pre-pandemic and pandemic times OPEC+ was more interested in a stable market with reasonably high prices, reflecting the consensus opinion among the majority of the cartel’s participants, the decision to reduce production volumes from May 2023 onward was more determined by the traditional desire of Saudi Arabia and its closest Gulf partners to raise prices as high as possible to fund their ambitious economic programs.

Shoring up the ranks

And yet the cartel is not as powerful as it would like to be. As the oil market gets used to the new realities, the effectiveness of OPEC+’s leverage seems to decrease while the number of market-shaping factors beyond its control grows and becomes more complicated. Thus, according to the U.S. Energy Information Administration (EIA), “ongoing considerations about weakening global economic conditions, perceived risk around the global banking sector, and persistent inflation” appeared to be among the factors that prevented oil prices from going up despite the OPEC+ decision to cut output in May.

Indeed, OPEC+ might have already exhausted the means (apart from psychological pressure) it has at its disposal to influence the markets. Production cuts are not an instrument that can be utilized too often. Taking into account possible risks and side effects, not all OPEC+ members are ready or even able to adjust production volumes on a monthly basis. Thus, in May 2023, only eight OPEC+ members decided to pursue voluntary production cuts (see Chart 3). And by June, only Saudi Arabia remained ready to deepen the cuts. It would appear, therefore, that in terms of further production decreases, OPEC+ may have already reached its limits.

Source: Reuters

Under these circumstances, other decisions made by OPEC+ in June were probably an attempt to exploit remaining options to increase the cartel’s impact on the market and brace its membership for further economic storms. A lack of discipline and unity among the cartel’s participants, however, along with a disparity between the real and nominal production capacities of some members, have long been issues within the cartel. The Saudis could tolerate this as long as production cuts continued to provide the necessary leverage. However, the failure of the May reductions to raise the price of oil was a turning point. And the Saudis used the subsequent June meeting of OPEC+ to shore up the ranks. Thus, a preventive conversation was held with Russia regarding the need for greater transparency in the latter’s oil production plans. Moreover, Russia together with Angola, Azerbaijan, the Republic of the Congo, Nigeria, and Malaysia were obliged in 2024 to adjust their production obligations in light of their real capabilities in order to avoid further unnecessary distortions (see Charts 4 and 5). External agencies such as IHS, Wood McKenzie, and Rystad Energy will monitor their compliance in the future. To a certain extent, these were desperate measures, which inevitably generated some frustration among other OPEC+ members — Russia, for instance, was deprived of its right to have the same production quota as Saudi Arabia, which in truth never matched real Russian capacities but had been a symbol of the ostensibly equal partnership between the two countries in OPEC+ (see Charts 4 and 5).

Source: Bloomberg

Source: Bloomberg

What’s next?

It remains to be seen whether the June measures will help OPEC+ reestablish its influence in the global oil market. Saudi Arabia once again proved it is the principal leader of the cartel, ready to take responsibility for the decisions taken. Despite the fact that the May attempt to raise prices was unsuccessful, Riyadh is not going to retreat from the tactics of active market influence through adjusting production volumes, even if it requires the kingdom to act alone. In a way, the June meeting was used by the Saudis to restore order and prepare for the further struggle for higher price levels. However, the chances of OPEC+ winning this battle are, for now, unclear as plenty of factors determining oil prices are out of the cartel’s control. The next two to three months will be decisive. If the OPEC and IEA expectations of a late-2023 supply-side market deficit come true, OPEC+ might even start increasing output to avoid conflicts with consumers (by canceling voluntary cuts, for instance). If not, the group’s members will have to accept the new realities and bear the cost of their previous steps. In this negative scenario, nothing else will be possible as further cuts by OPEC+ (with the exception of Saudi Arabia) will hardly be possible.


Dr. Nikolay Kozhanov is a research associate professor at the Gulf Studies Center of Qatar University and a Non-Resident Scholar with MEI’s Program on Economics and Energy.

Photographer: Simon Dawson/Bloomberg via Getty Images

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