Ways the US can resolve its dilemma on oil prices, the environment and Opec+
Opec+ meetings have become oddly routine. They will probably not stay like that, but on Thursday, the group swiftly agreed to continue its plan of raising output by 400,000 barrels per day next month. The demands of the US president to cool off prices have been disregarded.
The oil exporters’ decision is easily understood. Brent crude around $82 per barrel is above the historic average but not particularly high, certainly compared with record gas, coal and electricity prices. Oil prices have dropped over the past two weeks.
Although stocks have been sharply drawn down over the past few months, the group is concerned that they are forecast to rise both next year and in 2023. The first quarter is usually the weakest for demand growth. They still have a wary eye on coronavirus cases, particularly given China’s widening outbreak.
It would be easier to hold back on production now and raise it in January, if required, than to boost output now and then have to persuade members to hold back later. That might force Saudi Arabia back into making additional voluntary cuts, which it would be loath to do. Riyadh emphasised the decision by sharply raising its official selling prices to Europe and Asia.
The Biden administration’s concern is also comprehensible. Opec+’s planned production increases are not being met because a growing number of members such as Angola, Algeria and Nigeria are unable to pump to their assigned limit. That situation may worsen as allocations keep growing. As one of the few countries with substantial remaining spare capacity, this supports the UAE’s push in July to raise its baseline.
High prices at the pump are one of the most salient economic indicators to Americans, especially as inflation and supply chain disruptions strike many other goods and commodities. Without much new production on the horizon outside Opec+, more oil is needed to substitute for pricey gas over the Northern Hemisphere winter, meet a continuing robust recovery in consumption and support the gradual resumption of largescale aviation.
Before electric vehicles seriously chip away at petroleum demand, oil prices are likely to be only cooled off over the next two years by an unlikely breakdown of Opec+ cohesion, a serious Covid resurgence or interest rate rises and an economic slowdown. The oil exporters’ ministers need to watch those risks carefully and not let prices rise into the red zone.
But there is little US President Joe Biden can do practically and desirably. He inherited this problem. It seems almost forgotten that it was Donald Trump, back in April last year, who pushed vocally for the Opec+ alliance to make deep production cuts in the face of the Covid-induced demand collapse, to save the American oil industry.
US oil output peaked at about 13 million bpd before the pandemic, then slumped and have now revived to about 11.5 million bpd. The Democrats’ message has been strongly pro-climate. However, a slow recovery in production is not because of environmental restrictions but shareholders’ impatience to see cash returned instead of burnt on profligate drilling. Higher prices are now finally encouraging rising output, but not the breakneck growth of the past years.
The Biden administration has focused on tightening regulations on domestic oil production, halting drilling on federal lands and in sensitive areas, and blocking new pipelines. Incentives for electric vehicles and tighter fuel efficiency standards would cut US oil demand in the longer term.
Neither of these policy prongs has yet had any significant impact. In any case, the industry needs regulation to prevent methane leaks and flaring of unwanted gas. In that respect, Mr Biden is doing responsible operators a favour.
The short-term tool at the US president’s disposal is the strategic petroleum reserve, from which oil could be released to cool the market – temporarily. But the reserve is meant to be saved for emergencies such as shortages caused by natural disasters or wars. Mr Biden did not mention any release in a speech on Friday, and prices rose more than $2 per barrel in response.
He could also push harder on a revived nuclear deal with Iran, that would bring its exports back on the market. But that also faces major political opposition at home, requires co-operation from Tehran and will be lengthy and complicated.
There could be a package of strictly short-term measures, such as tax breaks for environmentally compliant operators and ending Trump-era steel tariffs that increased costs. Raising oil output at home will affect prices, put some pressure on Opec and could call the US industry’s bluff. But it would still face bitter environmental opposition.
Better than threatening to do something and proving impotent, it is wiser to change the narrative. Calling simultaneously for net zero carbon and for Opec to increase output pleases no one.
One alternative is to shift course and declare that oil consumption is going to fall but that while it does, as much of it as possible should be met by the US and its allies, with strong environmental protections. A carbon tax or border tariffs would put surplus oil rents back into American pockets.
The other is to explain directly that the low-carbon transition will be challenging and sometimes painful, but that the future holds less pollution, lower energy costs, better vehicles, greater energy security and, above all, a liveable climate.