Why 2 million Saudi barrels will not solve world’s oil problems
President Donald Trump’s move to pressure OPEC to increase production is not the optimal solution to cool down higher oil prices.
That is because there is no single country or group that can carry the burden of balancing the oil market alone these days.
In response to pressures from oil consumers, OPEC and its allies decided last month to increase production starting from July 1 by a nominal 1 million barrels a day to calm the market fears over possible shortages and to lower oil prices.
However, that hike seems not enough as oil prices closed on Friday at a little short of $80, the same level that triggered complaints by the US and other oil consumers two months ago.
So why is this happening? And will exerting more pressure on OPEC resolve the situation? Probably not.
For a start, the world needs a new class of leaders who think of OPEC in the light of new developments.
Today OPEC should not be blamed for any price as its control over the market, although still strong, is not what it used to be in the 1970s and 1980s.
Asking OPEC to carry the burden alone will not resolve the situation in the long term and certainly will not impact prices for a long period.
There were times when OPEC was behaving as a cartel as it pumped more than 50 percent of the world’s oil and it had an idle spare capacity in the 1980s that could be counted in tens of millions of barrels. This year the group will be pumping one third of the global supply while two-thirds of that will come from outside of OPEC.
As for spare capacity, it is almost zero outside of Saudi Arabia. Reality speaks for itself. Confronted with its inability to rebalance the market single-handedly, OPEC had to form an alliance with producers outside the group.
A paradigm shift in global oil markets necessitated such a move. Through the help of Russia and other producers, OPEC was finally able to regain some of its old glory, and after 18 months of voluntary cuts, the oil price rose and inventories shrank both onshore and on floating storages in the sea.
As oil prices rose to $80, politicians worldwide started to call on OPEC+ to do something. The alliance took a decision to increase production but prices did not fall by as much as expected.
Confronted with its inability to rebalance the market single-handedly, OPEC had to form an alliance with producers outside the group.
Why did that happen? Firstly, the market is still tight. Libyan oil production is now down to 700,000 barrels a day from 1 million barrels a day.
The situation in Venezuela is not improving and supply is projected to weaken further. Canada is facing a supply disruption this month and Mexico is seeing a steady decline in oil production due to lack of investments.
The situation is the same in Angola and elsewhere.
The US is pressuring its allies to bring imports from Iran to a complete halt. Sourcing other alternatives for Iranian crude in the market won’t be a problem for now, but there is at least 500,000 barrels a day of Iranian condensates that can’t be replaced easily even as the US is now exporting more condensates and light oil to the rest of the world.
Despite natural declines in fields, most of the disruption in the market now is the result of geopolitical tensions. Investors are now bullish on oil prices because of that and they have raised their net-long position in the week ending June 26 by the most in seven weeks.
Short-only positions went down to the lowest in more than five years, according to weekly CFTC data published on June 29.
So as long as there is political tension, harmful price volatility will remain. President Trump is now asking Saudi Arabia to tap its spare capacity to cover the shortage. Saudi Arabia was wise in its response according to official statements from Riyadh and the White House. It will continue its role in stabilizing the market but there is no commitments on how much it will pump.
Politicians do not understand that asking Saudi Arabia to pump more will leave the market with a thin buffer of spare capacity. Geopolitical uncertainty means that in itself could lead to higher oil prices as fear over more shortages mount.
But the Saudis know that.
Moreover, politicians need to address long-term issues such as lack of investments in oil and gas, something they are not willing to do as more governments are supporting the shift from fossil fuel and adapting unfriendly policies to hydrocarbons.
Reasonably high oil prices are needed for investments to continue. And surely, the world needs political stability. That is not happening with international trade wars or unstable governments in oil production.
Two million barrels a day of spare Saudi capacity will not be enough to solve all the world’s problems. That is why there is an enormous need for constructive political thinking and dialogue and less OPEC finger-pointing.
- Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” Twitter @waelmahdi