SEEING EYE-TO-EYE ON THE PRICE OF CRUDE
It is unusual for the United States, Saudi Arabia and Russia to see eye-to-eye, much less try to achieve common energy-policy goals, even indirectly.
But that is what seems to be happening, and it is taking the edge off the year-long rise in oil and gasoline prices. Even if those countries have their own reasons for welcoming the surge in production, it is also reducing the influence of the Organization of the Petroleum Exporting Countries, which will meet in Vienna next week to discuss production cuts put in place in early 2017.
The cheerleader, if not ringmaster, in this effort is President Donald Trump, who took to Twitter on Wednesday to criticize OPEC for high crude prices. “Oil prices are too high, OPEC is at it again,” he wrote in his second such statement since April. “Not good.”
Whatever happens at the OPEC meeting, two of the biggest players in the global oil market — Saudi Arabia and Russia — appear to have already calculated that it is in their immediate interest to crank up production, effectively sidelining the Saudis’ fellow cartel members.
Between them, the two countries have each added more than 100,000 barrels a day to global oil supplies. Trump wants even more crude sloshing around the market to tamp down energy prices before the congressional elections in November, and it looks like he may get it.
It is perfectly normal for Republican and Democratic administrations to try to nudge oil prices down, but rarely — if ever — has the effort been so blunt and public. For decades, whenever presidents faced rising gasoline prices, U.S. officials privately called Saudi Arabia seeking help in getting OPEC to boost production — something that the Trump administration has done, as well.
But Trump appears unsatisfied with limiting his overtures to private diplomacy. He is publicly targeting OPEC even though oil prices have stabilized since his criticism in April, and regular gasoline prices have slid by roughly a nickel a gallon since Memorial Day. A barrel of oil in the U.S. now costs about US$67, down nearly US$4 over the past month, although that is still about 45-percent higher than at this time last year.
Saudi oil officials have agreed to boost production publicly, in co-ordination with Russian officials who would like to export more oil to bolster the country’s economy. That may well upset Iran, Venezuela and other OPEC members that want higher oil prices, making the coming meeting a contentious one.
President Vladimir Putin of Russia and Saudi Arabia’s Crown Prince Mohammed bin Salman will discuss oil and other issues Thursday as their teams face off in the World Cup. The stars appear to be aligned for them to work together to keep oil prices from climbing too high, too fast, despite the collapse of Venezuelan production and the expectation new U.S. sanctions will target Iranian oil exports.
“There’s a commonality of interest that fortunately and coincidentally came together,” said Larry Goldstein, a director of the Energy Policy Research Foundation. “Putin is under pressure domestically to export more oil, the Saudis got a little nervous when the Brent price hit US$80 a barrel, and the U.S. is nervous about their Iranian policy and the possibility of soaring gasoline prices.”
The result has been a partial reversal in energy prices, which should cheer elected leaders and economists who worry that high energy prices could hurt global economic growth.
But whatever the advantages for consumers and U.S. foreign policy, oil price relief could be modest and short-lived.
Trump, for instance, is pursuing several policy goals that cut against each other. He wants lower gasoline prices to keep the economy humming. At the same time, he wants to squeeze Iran and Venezuela with sanctions, which would inevitably lower the amount of oil on the world market. Venezuela’s oil exports are falling by tens of thousands of barrels every month, and Iranian exports could fall by between 200,000 and 1 million barrels a day by next year, analysts say.
A boom in oil production in the U.S. has helped increase global supplies even as OPEC countries cut back to raise prices. But experts believe a shortage of pipelines will limit the amount of oil firms can extract from the Permian basin of Texas and New Mexico, the main sources of new U.S. production, until late 2019.
Scott D. Sheffield, chairman of Pioneer Natural Resources, a major Texas oil producer, said if there were a significant decline in Venezuelan and Iranian exports, “and Saudi doesn’t increase output, we’re going to see US$100 oil by the end of the year.”
Just a few years ago, US$100 a barrel was considered normal. But prices collapsed in 2014, falling in the U.S. to below US$30 in early 2016, as a glut of oil filled up tankers. Now the world’s big oil producers are seeking a sweet spot for oil prices.
U.S. and global oil prices rose modestly Wednesday despite Trump’s criticism.
Even as he has criticized OPEC, Trump has found a willing ally in Saudi Arabia. Riyadh has long argued against the Iran nuclear deal, and pressed the U.S. to put more pressure on the Shiite Islamic regime. The Saudis are fighting Houthi rebels backed by Iran in Yemen and have been trying to counter Iranian influence in Syria and elsewhere.
Iran would like higher oil prices, because it needs money to invest in its weakened oil industry and ailing economy. But its exports could falter with the return of sanctions that had been removed under the nuclear deal. And other OPEC members will seek to take advantage of Iran’s misfortune by selling more oil to big markets like China and India.
“If you are the Saudis, you want to do Trump a favour and get him off your back,” said Robert McNally of Rapidan Energy Group.
Sadad Ibrahim Al Husseini, a former executive vice-president of the Saudi Arabian Oil Co., said Russian and Saudi Arabian leaders “will look at gradual but steady increases of overall supply, easily between one and 1.2 million barrels a day by year-end.”
The two countries will probably lobby other oil-producing nations to also raise output, particularly Kuwait and United Arab Emirates, both OPEC members.
Besides juicing economic growth, Russia has other reasons to export more oil. Russian oil firms, increasingly active in Venezuela and the Middle East, have recently raised their production capacity. They also prefer lower prices because they pay higher corporate tax when prices go above US$75 a barrel.
“Russian firms have long been pushing to produce more,” said Jason Bordoff at Columbia University. “They have invested heavily in new production capacity and see far more upside from additional production rather than higher prices.”
Russian President Vladimir Putin, centre, shakes hands with Saudi Arabia Crown Prince Mohammed bin Salman during their meeting Thursday in Moscow where oil policy would have been a major topic of conversation.
U.S. President Donald Trump wants more crude sloshing around the market to tamp down energy prices before the congressional elections in November, and it looks like he may get it.