News of the week summary - 09/04/23

OPEC+ announces 1 million barrels production cut, in a surprise move adding to inflationary pressures.

OPEC+ has decided to cut oil production by more than 1 million barrels a day starting next month, contradicting previous commitments to maintain supply stability. This unexpected move has raised concerns about inflation and its potential impact on central bank interest rate policies worldwide. Saudi Arabia, the leading member of the OPEC cartel, accounts for a significant portion of this reduction, by slashing its production by 500,000 barrels per day. Russia announced that its production reduction of 500 barrels a day, initially planned from March to June, would now extend until the end of 2023.

This move is seen as an attempt by OPEC+ to increase oil prices and reduce reliance on macroeconomic factors. It has caused oil futures to surge by up to 8%, which may add to inflationary pressures. The Brent Crude (the world benchmark for oil) traded near $84 a barrel, and US gasoline prices increased, a matter of concern for American policymakers.

Top oil analysts are now predicting $100 crude prices in response to this decision, with some anticipating supply-demand imbalances earlier than expected.

The decision could escalate tensions between the US and Saudi Arabia, as the White House. Relations between the two countries have been strained since last year, with the US unsuccessfully urging Saudi Arabia to increase oil production.

Unions continue national strikes in protest of Macron’s pension reform.

French unions are staging fresh strikes and protests against Emmanuel Macron's pension reform, amid widespread public support for their movement. The bill, which seeks to raise the minimum retirement age from 62 to 64, has already passed parliament. However, unions believe they can still pressure the government into abandoning the reform. The protests have gathered record turnouts, fueled by anger after the government avoided a vote at the National Assembly through Article 49.3.

Unions are also looking to maintain pressure ahead of the Constitutional Council's ruling on the reform's conformity regarding the constitution.

This pension conflict is jeopardizing Macron's liberal economic reform program, which has been a focal point of his presidency since 2017. Backtracking on the pension reform at this stage would be a significant setback for him, but proceeding could further degrade his lack of a parliamentary majority and damage relations with unions.

Unless the reform is entirely rejected by the Constitutional Council, the pension dispute is likely to persist until Macron implements the changes later this year. Unions argue that raising the pension age disproportionately affects the least well-off and propose alternative solutions like higher taxes on businesses and the wealthy to balance the pension system. The government says that raising the pension fund is the only viable option to fill the massive deficits of the public retirement system as the number of retirees grows with the ageing of the population.

 

The EU and US in talks to unify their green economic policies.

The US and the European Union are negotiating to address growing tensions over green subsidies and trade. While both sides recognize the need to reduce their trade dependencies on China, differences regarding approaches to trade cooperation persist.

The US has sought to repair transatlantic relations after trade disputes during the Trump administration. However, the country remains focused on countering China's influence and has less interest in increasing transatlantic trade cooperation. Both the EU and America have implemented generous state subsidies for companies and tax credits to promote green industrial policies and reduce carbon emissions.

The US Inflation Reduction Act provides significant subsidies to promote green technologies. In response, the EU introduced the Net Zero Industry Act to ease access to state aid for clean technology investments. Europe feared that the US subsidies would distort the market and lead to an exodus of European clean energy investment, thus encouraging a global subsidy race.

To address these concerns, the two sides are negotiating a critical minerals deal aimed at reducing their dependence on China for raw materials. In return, the US will provide EU companies with more access to IRA subsidies and tax credits.

However, tensions remain, and Europe fears that a shift in US policy, especially if former President Donald Trump is reelected, could result in a more combative approach. China, keen to exploit these tensions, has strengthened its economic ties with European nations.

The stakes are high, as cooperation between the two economic giants is vital to create a global economic order that holds China accountable to international trade rules and standards.