So here we are: War and pandemic-tinged underinvestment are puffing up prices on everything from natural gas to coal, wheat and battery metals.
Most concerning is the market for oil. Spiking prices have pushed U.S. gasoline over $4, a third higher than a year ago, and diesel has risen even more sharply, to above $5. Oil inventories in the industrialized world have fallen for 14 months straight. And countries from Japan to the United States are tapping emergency stocks.
Amid this cyclone of commodity turmoil, there is one oasis of calm: The gilded parlors of OPEC.
Somehow, the cartel’s movers and shakers — Saudi Arabia and the United Arab Emirates — have decided that the best response to global commodity panic is no response at all.
The brevity of OPEC’s recent meetings symbolizes the rigidity of the cartel’s strategy. OPEC’s March gathering — amid gyrating prices from Russia’s invasion of Ukraine — clocked in at 13 minutes. The war wasn’t even discussed. Subsequent meetings have been similarly brief.
OPEC gatherings conclude with the same mantra: We continue our post-pandemic production restoration at just over 400,000 barrels per day, per month. Goodbye.
There is a post-truth quality to OPEC pronouncements: Markets are sufficiently supplied. Politics are the problem.
On May 10, UAE oil minister Suhail al-Mazrouei said oil markets were in balance but underinvestment would threaten OPEC’s ability to muster sufficient supply in the future as the pandemic fades.
In the future? How about right now? OPEC’s mission statement is in part to “ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers.”
OPEC is sitting on spare oil production capacity of roughly 3 million barrels per day. Add in Iran, which is under sanctions, and there’s at least 4m b/d sitting idle.
|OPEC spare oil production capacity in March 2022 (million b/d)|
Much of this capacity could have been brought online already, as the International Energy Agency, the White House and the Japanese government have pointed out. But while Saudi Arabia and its allies may be quietly redirecting flows to Europe, they have refused to tap spare capacity more aggressively.
Data show OPEC isn’t even keeping up with its drip-feed schedule. Angola, Nigeria and others are underproducing their quotas. And while production in Saudi Arabia and other Gulf states is generally keeping up, they have not taken opportunities — as they have in the past — to compensate for underproduction elsewhere.
In short, OPEC is acting strangely. Normally, when oil markets are under such stress, we see the Saudi oil minister “talking down” the market, to reassure nervous consumers and governments. If words fail, the next step is a production increase that releases spare capacity.
Saudi Arabia has for decades maintained a buffer of spare capacity for just this purpose.
Stability services are OPEC’s gift to the world. One scholarly paper estimated OPEC’s spare capacity provides the global economy a benefit worth $193 billion per year. Such actions contribute to keeping oil viable amid the increasing inroads of substitute fuels, particularly electricity. This year, OPEC is hoarding the benefit, in the form of a giant cash windfall.
So, why would OPEC disavow its own mission statement?
To be fair, the alternative explanations raised by OPEC are partly true. Refining bottlenecks are boosting gasoline and diesel prices. Financing constraints are slowing the response of U.S. shale producers. Congress’ NOPEC legislation, threatening the cartel with U.S. antitrust action, would make matters worse.
None of that explains why OPEC is sitting on spare capacity that would reduce oil prices. Three factors suggest a potential rationale.
First is the Russia effect.
Russia is now a member of the broad OPEC+ cartel, and a declared alliance partner of Saudi Arabia for “decades and generations.” Russia is in no mood to bring down costs for voters in unfriendly countries that have been sanctioning it and sending weapons to Ukraine.
The Gulf monarchies, usually firm U.S. partners, are now hedging. They aren’t explicitly backing Russia’s war, but neither are they alienating Moscow by cranking up output, driving prices lower and “stealing” Russian market share.
Second, rulers in the UAE and Saudi Arabia have a growing list of grievances with the United States.
These include what the monarchs see as insufficient U.S. help in their war in Yemen or defending them against Houthi retaliation.
The Biden administration’s return to nuclear talks with Iran is another sore point. In Riyadh, President Biden’s reputation is further tarred by his campaign goal to make Saudi Arabia a “pariah.”
Of course, chafing has always been a part of diplomatic relations between the United States and its Middle East partners.
What is new is Riyadh and Abu Dhabi’s willingness to use oil prices as leverage in addressing these grievances. That hasn’t happened since 1973 when Saudi King Faisal used an embargo to punish the United States for helping Israel retain territory it captured from Syria and Egypt.
The third confounding factor is the energy transition. Governments have begun shifting the massive fossil fuel-dominated energy system to cleaner technologies.
OPEC officials are correct in complaining that policymakers have, at times, emphasized long-term climate policy goals over short-term energy investment needs. But it is also true that oil officials overstate climate policy’s effects on oil prices.
Perhaps these factors are behind OPEC oil ministers’ description of “political” problems as if they were a recent phenomenon.
When it comes to oil, politics are inevitable. Oil is the lifeblood of the world’s transportation system — and of autocratic regimes like those in Riyadh and Abu Dhabi.
All are better off when markets are stable. OPEC ministers are missing an opportunity to bring some calm to a tumultuous world. They might even generate some goodwill in the process.