Dallas Fed Explains Why OPEC Cannot Fill The Oil Supply Gap

The members of the Organization of Petroleum Exporting Countries and allied producers such as Russia, collectively known as OPEC+, have been producing less oil than their collective quota allows in recent months, lowering global supplies and likely pushing prices higher. An examination of the situation by three economists at the Federal Reserve Bank of Dallas found that this “supply gap” is due to capacity constraints that are likely to become even more binding as we approach summer.

“There are several reasons this supply gap has emerged. One important explanation—and one that continues to play a role in 2022—is the inability of some OPEC+ members to increase production to take advantage of their growing quotas. These countries are bumping into capacity constraints for several reasons, including infrastructure issues and the difficulty of attracting sufficient investment to offset production declines at existing wells,” economists Lutz Kilian, Michael D. Plante, and Kunal Patel wrote in a piece published on the Dallas Fed’s website on Tuesday.

OPEC+ slashed production when oil prices collapsed in 2020 following the onset of the global pandemic and lockdowns. Last summer, the group of 23 nations began to unwind the pandemic cuts by collectively adding 400,000 barrels of daily production each month to the cartel’s quotas. Each nation gets a portion of that additional production that corresponds to how much they contributed to the 2020 cut. Saudi Arabia, for example, was responsible for 26 percent of the 2020 reduction, so its quota grows by 104,000 barrels per day each month. – READ MORE