The Mixed Economic Impact of OPEC's Production Increase

(JOE KLAMAR/AFP via Getty Images)

The OPEC logo is seen outside the bloc's headquarters in Vienna, Austria, on Oct. 4, 2022.

The OPEC+ decision to boost oil production in the face of tepid demand will further dampen oil prices, which will increase financial pressure on poorer oil exporting countries like Iraq and Algeria. And while cheaper oil will provide some financial relief for countries affected by U.S. tariffs (particularly oil-importing European and Asian countries), the risk of a tariff-induced global recession will remain. On May 3, the Saudi-led OPEC+ alliance of oil exporting countries announced that it will raise its collective oil production cap by 411,000 bpd (bpd) in June, compared with the original roughly 138,000 bpd production increase to which the bloc had previously agreed. The decision marks the second straight month in which OPEC+ has agreed to accelerate production by 411,000 bpd, meaning that in three months, OPEC+ will have brought nearly 1 million bpd back to the market since it began unwinding voluntary production cuts at the start of April. In 2024, OPEC+ agreed to phase out the bloc's 2.2 million bpd in voluntary production cuts — which primarily consist of production cuts by Saudi Arabia, the United Arab Emirates, Russia and Kuwait — from April 2025 until September 2026. However, citing five OPEC+ sources, Reuters reported on May 4 that OPEC+ may now unwind the 2.2 million barrel per day voluntary production cut by November 2025, with supersized monthly oil hikes likely to occur in July, August, September and October.

Following the OPEC+ announcement, the price of Brent crude oil, the main global light sweet crude oil benchmark, fell to a low of $58.50 per barrel on May 5 after trading began before recovering early in the trading week, reaching $62 per barrel on May 6. Last week, Brent fell below $60 per barrel for the first time since February 2021. U.S. domestic oil benchmark West Texas Intermediate also recently fell below $55 per barrel — a key symbolic threshold, as many shale oil producers in the United States will significantly reduce new drilling and oil well completions if oil prices are around $50 per barrel.
OPEC+ originally agreed to 2.2 million bpd in voluntary production cuts in 2023, in order to prop up prices that had declined after an initial spike in the wake of Russia's invasion of Ukraine in February 2022. The bloc has also approved other production cuts totaling 3.65 million bpd through the end of 2026.

The OPEC+ decision to quickly bring oil back to the market indicates that Saudi Arabia is no longer trying to steer oil prices higher, due in part to a failure of this strategy and as a pressure tactic to try to punish OPEC+ countries, such as Kazakhstan and Iraq, that have been producing above their quota. In 2014, de facto OPEC leader Saudi Arabia surged oil production, partially in an effort to drive U.S. shale oil producers out of business, which led to the 2014-16 oil price collapse. Since then, however, Saudi Arabia and its close Gulf oil-producing allies, Oman and Kuwait, have largely switched strategies by seeking to prop up oil prices instead. Saudi Arabia and its allies have effectively been willing to cede market share to growing non-OPEC+ oil producers (mainly Brazil, Canada, Guyana, and the United States), accepting large production cuts to do so. However, several key OPEC+ members — chiefly, Iraq (OPEC's second-largest oil producer) and Kazakhstan — have consistently outproduced their quotas in recent years. This has prompted Saudi Arabia to threaten to unwind production cuts, as well as demand that Iraq and Kazakhstan adopt plans to further reduce their oil output as a way to make up for past overproduction. Compared with Iraq and Kazakhstan, Saudi Arabia has greater financial buffers to withstand a prolonged period of low oil prices, thanks to the kingdom's billions of dollars in reserves and sovereign wealth funds. Additionally, lower oil prices increase Saudi Arabia's leverage against Iraq and Kazakhstan to force them into compliance with OPEC+ production cuts, particularly as both lack the same financial buffers to deal with the prolonged revenue decline. As such, Saudi Arabia and OPEC+'s decision to boost oil production signals their willingness to accept oil prices dipping into the $50s and grow market share, as well as their desire to pressure Iraq and other countries to share more of the burden in production cuts. Against this backdrop, the pace at which OPEC+ phases out its 2.2 million bpd in voluntary production cuts (as well as potentially the 3.65 million bpd in other production cuts) will thus likely hinge on concessions made by overproducers like Iraq and Kazakhstan, as well as market conditions, as Saudi Arabia may not be willing to let oil prices dip into the $40s or $30s if U.S. tariffs trigger a global recession.

In the first seven months of 2024, Iraq exceeded its production quota by around 200,000 bpd. The country agreed to a compensation plan to cut production from between 90,000 to 120,000 bpd each month from August 2024 to September 2025; the scope of this plan — including the volume of cuts and timeline — has since been expanded due to Iraq continuing to overproduce. Kazakhstan is in a similar position, albeit at a lower overall level due to it being a smaller oil producer.
Iraq's non-compliance with OPEC+ cuts comes as its oil production capacity has increased amid growing investment in the country's upstream oil and gas sector. This is despite nearly half a million bpd of oil exports from Iraqi Kurdistan being halted since March 2023 over a dispute with the Kurdistan Regional Government, Kurdish oil producers and Turkey.

Low oil prices will increase the risk of economic instability and social unrest in oil-producing countries that lack fiscal buffers to deal with the extended revenue decline, such as Iraq and Algeria. Weak oil prices are already fueling concerns in Angola. On April 28, the African country's finance minister said the drop in oil revenue may eventually force the government to begrudgingly seek a loan from the International Monetary Fund (IMF), despite Angola's checkered past with the Fund. If increased OPEC+ production further reduces oil prices, many other producers in the developing world — including Algeria, Colombia, Chad, Ecuador, Equatorial Guinea, Gabon, Ghana, Iraq and Nigeria — would all find themselves in a similar position, though their need and willingness to engage in talks with the IMF would vary from country to country. The bleak outlook for oil prices also comes as the United States is curbing aid to many of these oil-producing countries, while simultaneously increasing tariffs on their exports (and those of many other countries). This effectively deals a double-whammy, as Washington's tariffs are set to slow down the global economy, which will disrupt demand for non-oil exports, too, among U.S. and non-U.S. consumers alike. Faced with this emerging economic reality, Algeria and Iraq's governments, in particular, may be forced to curb social spending programs, leading to a high risk of economically-motivated protests if low oil prices persist, which both countries faced in the wake of the 2014-2016 oil price collapse — and which, in Algeria's case, ultimately led to the ouster of longtime President Abdelaziz Bouteflika in 2019. For the Iraqi government, low oil prices will also exacerbate the already extremely challenging political environment it will face in the next six months, as the country gears up for November general elections, which are often marred by violence, and braces for more severe power outages this summer following the expiration of a U.S. sanctions waiver in March that had previously allowed Iraq to import Iranian electricity.

Low prices will benefit oil consumers and thus offset some of the economic damage caused by high U.S. tariffs, but they will not offset the risk of a broad global recession if the United States expands its tariffs. For the United States, a $10 drop in oil prices usually contributes to around a 0.1-0.3% increase in annual GDP growth by promoting economic activity among both consumers and businesses. Such a price drop would likely result in a similar GDP boost in other developed countries, with those more dependent on oil imports potentially seeing an even higher bump in economic growth. This means that for oil-importing developed countries (such as EU member states), the impact of lower oil prices, combined with the impact of the Saudi-led OPEC+ decision to boost production instead of propping up prices, will largely be limited to around a 0.3% bump in annual economic growth in the short term, at the most. This certainly falls short of offsetting the initial fallout from U.S. tariffs on China, which exceed 145% on most goods, and the U.S. tariffs on Mexico and Canada, which include a 25% tariff on finished vehicles. However, it provides a more significant buffer for the European Union and other U.S. trading partners that are only facing a 10% across-the-board tariff. That said, there is a chance the United States will raise tariffs those trading partners as well, should the White House move forward with implementing its so-called "reciprocal" tariffs, which are due to snap back in early July and amount to 20% for the European Union and exceed 20% for most Asian countries. If this happens, the decline in oil prices will likely only partially offset the fallout from U.S. tariffs, as the risk of a global recession would remain high — and at that point, lower oil prices become more of a symptom of a global economic crisis rather than a cure for it. For the United States, in particular, low oil prices may not translate to the typical 0.1-0.3% GDP boost this time around, as the country has grown as an oil producer over the past decade, which has made the U.S. economy more vulnerable to oil market shocks. And while an oil price collapse would economically benefit U.S. states that are not oil or natural gas producers (including many in the west, southeast, midwest and northeast), it would have significant negative impacts on states highly dependent on oil production, including Texas, New Mexico, Louisiana, Colorado, Wyoming, Oklahoma, Alaska and North Dakota. Meanwhile, in nearby Canada, low oil prices will have an even more significant impact on oil production in Alberta and Saskatchewan, as the country is potentially facing export taxes and tariff restrictions from its main oil customer, the United States.

In report published on April 10, Yale's Budget Lab estimated that all U.S. tariffs implemented up until that date (which excludes the April 9 reciprocal tariffs that were suspended) would cause long-runGDP changes to be -2.19% for Canada, -0.57% for China, -0.57% for the United States, -0.02 for Mexico. The same report estimated the tariffs would boost economic growth for Japan, the European Union and the United Kingdom.
In a report published on April 17, the Brussels-based think tank Bruegel compared the estimated long-term economic impact of various U.S. tariff scenarios on different U.S. trading partners. The study found that the impact on the European Union generally ranged between a 0-0.5% drop in long-run GDP, even in scenarios where large tariffs were placed on Europe and not removed as part of an EU-U.S. trade deal.