Why we don’t have to worry about the oil price
About the effects of OPEC's decision to cut production / #25
We might not like to hear it, but there is still no more important product in the world than oil.
That's why a message this week was important – and confusing at first glance. Amidst an energy crisis, OPEC+, a loosely affiliated entity consisting of the 13 OPEC members and 10 of the world's major non-OPEC oil-exporting nations comprising most of the world's oil exports, agreed to cut production by two million barrels per day. This is the biggest slash in production since the beginning of the COVID pandemic in 2020.
My first thought: Why cut production when energy (not only in Europe) is in dire need?
The first supposed obvious answer: it looks like political campaigning against the West. Just before the midterm elections in the USA, Joe Biden is seeking lower prices at American gas stations. And not only Europe is looking for cheaper energy to lower its soaring inflation. Plus Putin's Russia (which is part of OPEC+; US is not) is interested in high oil prices for two reasons: to finance its war against Ukraine and to hit the West with high energy costs.
So it seems that this week's decision of OPEC+ was politically motivated.
It might not.
OPEC is pursuing a price target of $100 per barrel. Actually, the price is around $90 (see chart above). So OPEC has a reason for tightening supply.
There are other reasons to add.
Since only two OPEC countries met their current quota, actual drops will be lower than on paper.
China continues to lock down once-bustling cities and therefore doesn't need the amount of oil it used to need.
The US and its allies have released 180 million barrels from its reserve since March to counter the shortages triggered by the sanctions against Russia.
Above all, relevant parts of the world are facing a recession. Then oil demand will drop. The oil-exporting countries are probably concerned that the price of oil will plummet.
Worries are justified. During the financial crisis (2008/2009), prices dropped from $145 to $35; in 2014/2015, they dropped more than 50 per cent to $45; and during the pandemic, prices crashed to below zero (at least for some hours; producers were forced to pay buyers to take oil because they had no space to store it).
Summing up the above thoughts, the oil cartel is doing business as usual. As with every cartel, OPEC tries to maximise its turnover by restricting supply (here is how this works). And as always with cartels, there is an incentive for each member to expand their supply beyond the limit they agreed on (which is good news for all the oil consumers in the world since that results in actual prices often being lower than the targeted price).
So the oil price will probably not be the biggest problem in the coming months.