Saudi Arabia, one of the largest oil producers, if not the largest, decided to halt its oil production for the time being. This news exerts a tremendous impact on commodity markets, especially on the oil market. What did motivate Saudi Arabia to cut its oil production? The Saudi Energy 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. Moreover, the Saudi Energy Ministry said the cuts would be made in coordination with some OPEC and non-OPEC members. The earlier cuts—of some 2 million barrels a day—had come on the eve of the U.S. midterm elections in which soaring prices were a major issue. President Joe Biden vowed at the time that there would be “consequences” and Democratic lawmakers called for freezing cooperation with the Saudis. This oil production cut is not only affecting American markets. It affects the rest of the world, notably African markets.
The laws of supply and demand dictate that when there is a decrease in the supply of a commodity, but demand remains the same or increases, prices will rise. This is because buyers are willing to pay more to secure the limited supply of the commodity. When oil-producing countries or organizations cut production, they are essentially restricting the supply of oil, which leads to higher prices. Furthermore, the market often anticipates production cuts and reacts accordingly by bidding up oil prices in advance of the actual cuts. The anticipation of cuts can also lead to a decrease in oil inventories as buyers purchase oil before the cuts take effect, further driving up prices.
Cutting oil production can have significant effects on African markets, particularly those countries that are major oil producers or have significant oil-related industries.
For countries that rely heavily on oil exports, a cut in oil production can lead to a reduction in revenue and foreign exchange earnings. This can result in budgetary pressures, lower government spending on public services and infrastructure, and a decrease in economic growth. In some cases, a reduction in revenue from oil exports can lead to balance of payment deficits and currency depreciation. On the other hand, if the cut in oil production leads to an increase in oil prices, this can benefit African countries that are net importers of oil. This is because they will have to spend more to import oil, but they may also see an increase in revenue from exports of other goods and services, such as agriculture or manufacturing, as demand for these products increases in response to the rise in oil prices.
It is important to note that the effects of cutting oil production can vary depending on a variety of factors, including the size of the oil sector in the country, the level of economic diversification, and the extent of government policy response to the change in oil prices.