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The political perils of low oil prices

An extract from European Energy Review’s The political perils of low oil prices with our emphasis:

A not so silent war is being waged in the oil world right now. Prices have tumbled 31% since March which means someone needs to set a price floor, and do so fast. Most OPEC states had hoped that was going to happen when the cartel recently met in Vienna. But official quota levels were kept at 30 million barrels per day (mb/d), with the implicit agreement that once delegates flew out of Schwechat Airport, Saudi Arabia would start closing the taps to bring OPEC’s non-official 31.8 mb/d production in line with the formal target. Saudi swing, Riyadh ropes.

Fair enough, but what everyone wanted to know, and especially Iran, Venezuela, and Algeria, was how far and how fast Saudi was going to make cuts and ‘balance’ the market. With Brent prices regularly dipping well below $100 and WTI prices considerably lower, OPEC hawks are getting very nervous. Non-OPEC producers in Russia and Central Asia even more so. Assuming demand side dynamics don’t drastically pick up in Asia, we can expect three things to sequentially happen.

  • The first is an international price war across all producer states to force Saudi Arabia to take assertive action to tighten the taps and raise prices. That will be a difficult process given Riyadh has its own strategic objectives to want a sustained period of moderate prices, well below $100/b. 
  • Secondly, if petro-hawks lose this price war, their political bluster will subside, and a far ‘cruder’ trend will emerge. They will have to cut back on domestic spending, which is bound to lead to a new round of protests, and more importantly sharpened domestic repression. 
  • Given repression is no longer the ‘effective’ tool it once was for producer states, that could well lead us to a third, and far more daunting prospect: any price floor will be set by producer states folding under the weight of political pressure when new crises hit. The flat price of crude will be influenced more by political unrest clipping production than by active supply restraint.

Quite fascinating really. Especially the connection to political repression…

But how do you avoid cuts, while keeping prices supported and not hindering your own revenues?

(Surely not a job for collateralised oil loans…?)

- Izzy