Motorists can look forward to golden times, Russia will suffer particularly badly

Eight members of the OPEC+ group, including Saudi Arabia, Iraq, and the United Arab Emirates, agreed on Sunday, September 7, to increase oil production by 137,000 barrels per day starting in October.

Although this is a more modest step than the last one in July, when production was increased by half a million barrels, the overall trend is crucial. The oil cartel is sending another clear signal that the era of production restrictions to maintain high prices is coming to an end.

Now, the oil-dependent countries want to regain the market share they lost to the emerging Americans when they cut production in 2022 and 2023 to support the price increase.

Since the spring of this year, the cartel has already put back on the market the entire amount (2.5 million barrels per day) that it had taken off the market during the first major production cut. And its decision on Sunday came more than a year ahead of the scheduled date for the release of the second tranche of production cuts (1.65 million barrels).

Unless something unexpected happens, oil will become cheaper

An increase in oil production means that supply will rise. And the more that has to be sold on the market, the cheaper it will become.

So far, this has not happened in response to reports of increased production. The price of Brent has fluctuated steadily around $65 per barrel since the beginning of the summer.

This is less than the triple-digit sums seen shortly after Russia's invasion of Ukraine, but still above the spring low of $58. The holiday season, when fuel consumption is higher, as well as the twelve-day war in the Middle East and the constant swings between positive and negative news about developments in Ukraine are keeping prices stable for now.

However, analysts predict that there will be a gradual decline by the end of the year. And they will fall well below the $60 mark, which they should not significantly exceed during the course of the year.

This means that golden times are ahead for motorists in Europe and the US. Gasoline and diesel for two euros are already a thing of the past. A liter costs around one and a half euros at the gas station. And with oil prices falling, they could reach a level not seen since the end of 2021.

Taking inflation and nominal wage growth into account, filling up the tank costs motorists significantly less today than in the years before the crisis.

In 2015, when 95-octane gasoline cost an average of around 1.25 euros and the average wage in Slovakia was 883 euros, filling up with 100 liters would have cost more than 14 percent of income. Currently, it is only around ten percent (despite a price of 1.5 euros). On average, of course.

Bad news for American oil companies

However, the OPEC+ decision and the fall in oil prices are not only affecting family budgets, but also have far-reaching consequences, often of geopolitical significance.

On the other side of the Atlantic, a different picture is emerging, but not for consumers, who are also happy there. The American oil sector is beginning to worry.

Despite Trump's promise, who campaigned with the slogan “Drill, baby, drill” before the elections, the situation currently looks very different. Not only do large companies have no plans to produce more oil and are postponing investments, but large companies such as Chevron and ConocoPhillips are also announcing massive layoffs of thousands of employees, and several projects are being suspended or canceled. According to the US Energy Information Administration, oil production in the US is expected to decline for the first time since 2021.

American oil producers are more sensitive to price developments than their Arab counterparts. While producing a barrel of oil costs Saudi Arabia an average of $10 and Russia around $15, the cost in the US is usually around $30, with shale oil production [which accounts for around two-thirds of US production, editor's note] only worthwhile at world market prices above $65.

But even in Europe, the costs are not low. The crisis is also affecting local energy companies. British BP has been laying off employees on a large scale since the beginning of the year.

And what about Russia?

The increase in oil production and the expected drop in prices are also having a negative impact on Russia. The price cap and the European embargo on imports of its oil have caused problems, but Moscow has adapted quickly and now has new sales markets in Asia.

However, relatively low oil prices have been undermining the national budget since the beginning of the year [as has the ruble, which has appreciated significantly against the dollar, the yuan, and the rupee this year, reducing the ruble-denominated revenues of Russian exporters and thus also the state's tax revenues, editor's note]. The state budget is based on a price of at least $60 per barrel. If the price is lower, there is not enough revenue flowing into the state coffers to cover expenditure. This must then be paid for from the reserve fund, which is steadily shrinking.

In addition, Russian Urals oil is traded at a significant discount (around 10 percent) compared to Brent. Its price is currently slightly above $60.

On the other hand, Russia belongs to the OPEC+ group and has coordinated its export policy with the exporters in the past. So far, however, there is no indication that it would significantly increase its production to compensate for the lower prices.

On the contrary, data from the International Energy Agency show that Russia reduced its oil production by 30,000 barrels per day to 9.3 million barrels in August, which is below the quota set by OPEC+. It has reduced its exports even more significantly.

In 2022 and 2023, it produced around 10 million barrels per day as normal. So there is scope to increase production and offset low prices. However, given the oversupply of oil on the market (compared to other exporters), Russia will have greater difficulty selling its oil, as this involves complications, borderline cases, and potential irritation of the US for buyers.