Saudis, oil giants announce surprise production cuts

“You are in a market that is relatively balanced. You take a small amount away, depending on what demand does, you could have a very significant price response.”

— Kevin Book, managing director of Clearview Energy Partners LLC

Saudi Arabia and other major oil producers on Sunday announced surprise cuts totaling up to 1.15 million barrels per day from May until the end of the year, a move that could raise prices worldwide.

Higher oil prices would help fill Russian President Vladimir Putin's coffers as his country wages war on Ukraine and force Americans and others to pay even more at the pump amid worldwide inflation.

It was also likely to further strain ties with the United States, which has called on Saudi Arabia and other allies to increase production as it tries to bring prices down and squeeze Russia's finances.

The production cuts alone could push U.S. gasoline prices up by roughly 26 cents per gallon, in addition to the usual increase that comes when refineries change the gasoline blend during the summer driving season, said Kevin Book, managing director of Clearview Energy Partners LLC. The Energy Department calculates the seasonal increase at an average of 32 cents per gallon, Book said.

So with an average U.S. price now at roughly $3.50 per gallon of regular, according to AAA, that could mean gasoline over $4 per gallon during the summer.

However, Book said there are a number of complex variables in oil and gas prices. The size of each country's production cut depends on the baseline production number it is using, so the cut might not be 1.15 million. It also could take much of the year for the cuts to take effect. Demand could fall if the U.S. enters a recession caused by the banking crisis. But it also could increase during the summer as more people travel.

Even though the production cut is only about 1% of the roughly 100 million barrels of oil the world uses per day, the impact on prices could be big, Book said.

“It's a big deal because of the way oil prices work,” he said. “You are in a market that is relatively balanced. You take a small amount away, depending on what demand does, you could have a very significant price response.”

The Saudi Energy Ministry said its own reduction of 500,000 barrels per day would be made in coordination with some OPEC and non-OPEC members, without naming them. The cuts are in addition to a reduction announced last October that infuriated the Biden administration.

The ministry described the move as a “precautionary measure” aimed at stabilizing the oil market. The cuts represent less than 5% of Saudi Arabia's average production of 11.5 million barrels per day in 2022.