Adnan Zai, Advisor to Berkeley Capital, is on the cutting edge of the financial world. We sat down with him to discuss Saudi Arabia’s recent decision to cut its oil production beginning in May and the likely impact it will have on the United States. Although Saudi Arabia is half a world away, Zai understands the way decisions made across the globe can impact local situations.
Kraven: On April 2, the oil-producing alliance of Saudi Arabia, Russia, and Iran made the choice to cut oil production by more than one million barrels a day, beginning in May. Although usually these types of decisions come after long, tedious negotiation with OPEC+, this decision seemed to come out of nowhere. Why did it catch everyone off guard?
Adnan Zai: Although the reduction will only account for 1% less oil, any move like this will be met with surprise when there is seemingly no discussion leading up to it. This speaks to the current climate of these countries and the autonomy that countries like Saudi Arabia are trying to create for themselves, not worrying about what other nations or OPEC+ itself will think about the moves they make.
Kraven: I think most people in the United States think that the vast majority of oil comes from OPEC+ nations, but in reality the U.S. only gets about 11% of its oil from this area. The United States is actually the biggest producer of oil, with nearly 19 million barrels produced per day and a 20% share of the world’s oil production. Saudi Arabia produces 10.84 barrels a day, and Russia 10.78 barrels per day. Since the United States produces the most oil, it seems like this decision in Saudi Arabia wouldn’t have so much weight. So why is there so much international unrest with this decision?
Adnan Zai: The production of oil and the system in general is always tenuous. Even minute changes to the system can have a profound effect on the price of gasoline at the pump. Although the reduction is only 1%, this will raise the price of gas with a ripple effect. The timing is also of utmost importance. Because the summer months of travel are just on the horizon, consumers will be buying more gas. The small changes matter, especially when consumers are filling their tanks for a road trip.
Kraven: Patrick De Haan, head of petroleum analysis at GasBuddy said “While the rising price of oil is likely the largest factor in rising gas prices, seasonal impacts continue to also exert pressure on prices.” This speaks directly to what you are saying. De Haan also asserts that “With oil prices touching their highest level of 2023 at nearly $83 per barrel, the national average price of gasoline has continued to inch higher, with 45 of the nation’s 50 states seeing prices rise over the last week.” What does that mean for the average person?
Adnan Zai: Any time crude oil goes over $80 a barrel in price, there is a decidedly strong price pressure at the pump. The prices around the nation are already going up incrementally, and will continue to do so as long as the price per barrel remains over $80.
Kraven: It makes sense. There is also another indicator that you don’t often hear much about, and this is the transition of winter to summer oil. According to De Haan, “With the Northeast making the final step in the transition to summer gasoline this week, states in that region should expect a sharp rise in gasoline prices over the next week or two. Every other region has already seen the final step in the transition occur, so while other areas will see prices continue to slowly rise, the Northeast is likely to see a pretty hefty jump of 15-40 cents per gallon soon.” Why does this affect the bottom line so much?
Adnan Zai: In the summer, gas with higher levels of volatile compounds creates a situation where the fuel evaporates more easily, so the Environmental Protection Agency prohibits winter gas from being sold from June 1 through September 15. The transition itself involves a laborious process for refineries, who must shut down production and switch to a new blend. As stated before, along with the changeover comes increased demand for gas with summer travel.
Kraven: No one has a crystal ball about what will happen with the oil prices, but there is certainly unrest surrounding the topic. It seems like we are at least a few weeks away from a peak, when the Saudi Arabia oil production reduction goes into effect, and when the summer travel season gets into full swing. The expert De Haan said. “Whether it hits $4 per gallon or not is still perhaps a 50/50 chance.” Do you think we will hit $4 a gallon?
Adnan Zai: I do think that conditions are ripe for hitting $4 a gallon in the coming weeks. With any luck, we will not top last year’s June prices when the national average for gas prices was $4.99 a gallon.
Kraven: Why should we care so much about oil prices when so many other parts of the economy seem to be struggling?
Adnan Zai: What is important to note is that the price of crude oil changes quite often, and the price of crude oil has a profound bearing on the rest of the economy. Many surprising events affect the price of crude oil. Interestingly, last month’s banking crisis caused the prices to drop, and it hurt Saudi Arabia’s bottom line. Cutting production is one method they are using to improve their own economy.
Kraven: What do you expect will be the ramifications of this choice to cut the oil supply?
Adnan Zai: Depending on the way the rest of the economy swings, people need to survive. They certainly might cut back on traveling. Gas prices for automobiles are certainly on the rise, but this also will affect the price of airline tickets. Along with that, the cost to ship goods across the country will likely increase, which will lead to increased prices across the board for goods and services. It is surprising what a 1% reduction can do in terms of the economy. This is just another viable example of how the world is so deeply interconnected.
Kraven: We truly appreciate your time, Adnan Zai. And we will be vigilant about looking for the latest increase at the pump.