An alliance of oil-producing countries on Wednesday announced a dramatic cut in oil output with major implications for U.S. gas prices, industry analysts told ABC News.
The group of nations known as OPEC+, led by Saudi Arabia and Russia, agreed on Wednesday to cut oil production by 2 million barrels per day starting in November.
The decision to slash oil supply arrives as crude oil prices stand at $93, well below a high in June of $123. Many forecasters are anticipating a global economic slowdown.
The move will cause a spike in U.S. gasoline prices that will last for months, analysts told ABC News. President Joe Biden can reduce some of the immediate price hike but lacks an effective option to mitigate the overall cost increase for U.S. drivers, they said.
Here's what the OPEC+ oil cut means for U.S. gas prices and how President Joe Biden has responded:
The OPEC+ oil cut will significantly raise U.S. gas prices
The OPEC+ oil cut will hike U.S. gas prices because the price depends on a balance between supply and demand.
A reduction of 2 million barrels of oil a day amounts to a roughly 2% loss from the oil market, since the world consumed nearly 100 million barrels of oil each day in August, the most recent month on record, according to the U.S. Energy Information Administration.
The U.S. is set to produce an average of 11.8 million barrels oil per day in 2022, which stands 500,000 barrels short of a record set in 2019, according to the EIA. But oil prices are set on a global market, where the OPEC+ cuts cannot be offset by a comparable short-term increase in U.S. oil output.
"You'll be looking at substantial upward pressure on gas prices," Ramanan Krishnamoorti, a professor of petroleum engineering at the University of Houston, told ABC News.
The average price for a U.S. gallon of gas is $3.86, according to AAA data. That price marks a 2% rise from a month ago and a 20% rise from a year ago. In California, the state with the highest average gas price, a gallon costs $6.42.
After the OPEC+ oil cut, the price will rise even further. The price will increase as much as 40 cents, reaching as high as $4.26, analysts said. The price hike will begin within weeks and last for months, they said.
The move will impose a uniform impact on gas prices across all regions of the U.S., according to Krishnamoorti and Peter McNally, a global sector leader for industrial materials and energy at Third Bridge.
Patrick de Haan, the head of petroleum analysis at GasBuddy, disagreed. Prices have already begun to increase in the South and Northeast, where prices had been stable in recent weeks, he said.
Areas on the West Coast and some of the Great Lakes states, however, which have experienced massive price spikes over the last few weeks due to refinery issues, will likely continue to see prices drop, though by not as much as originally anticipated, he added.
The Biden administration response
The Biden administration sharply criticized the OPEC+ oil cut on Wednesday. In a statement, the White House said Biden "is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin's invasion of Ukraine."
The Biden administration ordered the Department of Energy to release another 10 million barrels from the Strategic Petroleum Reserve in November.
The move continues an effort launched by the administration in March. The U.S. and its allies announced the collective release of 60 million barrels of oil from their strategic reserves over the following months, seeking to alleviate some of the supply shortage and blunt price increases.
The additional release next month from the strategic reserve could blunt some of the price increase in November but cannot mitigate the overall impact, analysts said. The administration lacks an effective tool to dial back the extended price hike, they added.
"There is no operation warp speed for the energy industry," said McNally.