Lower prices at gas stations would bring relief to oil-importing economies at risk of an economic crisis. However, they are a threat to the oil powers that do not want to let go. This resistance could be broken if oil consumers took a firm stand with the US, which so far remains sluggish, leading the way – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.
Consumers want cheaper oil
The largest oil importers seem to be hoping for a stable revival in demand, and are urging for an increase in supply. The producers associated in the OPEC + cartel are warning against a decline in demand due to the coronavirus and the economic crisis, and do not want to increase output for fear of oversupply. Everything is a matter of perspective. From the Polish point of view, cheaper oil would lower fuel prices at gas stations, and boost economic development, so necessary in the era of the specter of a crisis.
The US initiative to release an additional 50 million barrels of oil from the Strategic Petroleum Reserve disappointed the market. The US Department of energy will release 32 million barrels from the Reserve in the next few months, and sell another 18 million barrels. The Americans could release more to the market, in a more limited time frame, and encourage other consumers in China, India, Japan, South Korea, and perhaps also in the UK to do the same. So far, they have found no imitators, except for the preliminary declarations of some of these states. If other decisive steps are taken, the price of oil may fall for a longer time. So far, it has recovered its losses after initial declarations from the United States.
Americans expect global oil demand to grow steadily thanks to the economic recovery after the third wave of coronavirus, and the fourth probably not happening. The production hiccup, the rising costs for all businesses caused by the insufficient supply of production, including oil extraction, are increasing the cost of the barrel and fuel at the gas stations, reducing the gross domestic product, and therefore, in fact, hindering the revival of the global economy. This also has political impact, as it undermines the support for president Joe Biden.
Producers want petrodollars
The oil powers of the OPEC + oil agreement like Saudi Arabia and Russia have a different opinion. They are warning that the economic recovery may slow down with the fourth wave of the coronavirus, which is still not overcome by vaccines, as evidenced by the introduction of severe pandemic restrictions in Austria and Germany, as well as the possibility of similar developments in other Western countries, including Poland. The oil tycoons are making money from expensive oil that guarantees more and more petrodollars to the budget. This is another reason behind the consistent refusal to increase the volume, by which OPEC+’s oil supply could grow each month. Currently, that figure sits at 400 thousand barrels per month until September 2022.
OPEC + also fears (rightly or wrongly) that additional barrels sent to the market by customers from America and Asia could trigger oversupply of up to 1.1 million barrels per day, according to a document obtained by Bloomberg. It expects that the surplus on the market in December will reach 400 thousand barrels, in January 2022 – 2.3 million, and 3.7 million in February. Such a shift, combined with a possible slowdown in demand due to the pandemic restrictions, could lead to a sharp fall in oil prices, which producers fear, but which will be welcomed by consumers hoping for economic development aided by cheaper fuel. There have been suggestions that OPEC + should respond by cutting the amount scheduled for January. The technical commission of experts of OPEC + will hold talks on November 29. OPEC+’s Joint Ministerial Monitoring Committee (JMMC) will meet on 30 November 2021. Then, on the first and second of December, the group’s national delegations will meet. In the meantime, the above-mentioned oil consumers may intervene using their reserves.
Cheap oil is a threat to economies dependent on its export, i.e. petrostates. A group of major producers defends its interests, limiting supply and fearing that the oil price will be in crisis again. However, this would relieve economies that don’t depend on oil production, but still loose out on economic growth due to high oil prices. Only strong cooperation among oil consumers can break the impact of the new OPEC+ cartel, a possible successor to the Middle East-African OPEC, which is trying to dictate terms.
Fortune favors the brave
It is worth noting that oil producers can also thrive in a world where the barrel is cheaper. According to Rystad Energy, the threshold of profitability of new oil projects is constantly falling and reached USD 47 per barrel in 2021, i.e. by 8 percent compared to 2020 and 40 percent compared to 2014. Extraction of shale oil (e.g. in the United States) lowered the profitability threshold from USD 82 in 2014, to USD 47 in 2018, and USD 37 in 2021. This development could be wrecked if oil producers decide to lower production due to the pandemic and economic crises, which would decrease demand in a decade and beyond. Rystad Energy warns that the decline in activity caused by the coronavirus has reduced the forecast supply of shale oil in the US, which amounted to 135 million barrels per day in 2018, and in 2020 and 2021 to respectively 116 and 113 million barrels per day.
The crisis will not kill those who want to be flexible. The oil powers, too, could use the current situation to become independent of petrodollars, but the problem is that the money is bankrolling regimes in Moscow and Riyadh, which cannot afford an instant revolution that could unseat them. Therefore, OPEC + will probably continue to oppress oil consumers and won’t let the price drop too low. This means cheaper fuel at gas stations will only return in the face of a new economic slowdown caused by the coronavirus, unless the largest consumers establish a kind of an oil cartel that will break the resistance of producers. It is worth noting that cheaper fuels would give a respite to the economies of China and the US, on which global fuel demand increasingly depends, which would not allow the oil price to fall too low by way of feedback. Poland should therefore support the anti-cartel, and more long-term, also the societies of petrostates. This would be a headache only for the satraps at risk of losing revenue from hydrocarbon sales.