1 00:00:02,560 --> 00:00:10,040 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll and 2 00:00:10,080 --> 00:00:12,680 Speaker 1: this is Here's Why, where we take one new story 3 00:00:12,720 --> 00:00:14,760 Speaker 1: and explain it in just a few minutes with our 4 00:00:14,800 --> 00:00:16,400 Speaker 1: experts here at Bloomberg. 5 00:00:19,880 --> 00:00:22,200 Speaker 2: Take a look at the price of energy this morning. 6 00:00:22,200 --> 00:00:24,560 Speaker 2: Brent has slipped through sixty dollars. Fifty nine dollars is 7 00:00:24,600 --> 00:00:27,200 Speaker 2: where we're treating. We are basically back to a four 8 00:00:27,280 --> 00:00:28,240 Speaker 2: year low again. 9 00:00:28,520 --> 00:00:31,440 Speaker 1: When US President Donald Trump was inaugurated to his second 10 00:00:31,560 --> 00:00:34,840 Speaker 1: term in January, oil prices on the international benchmark Brent 11 00:00:34,960 --> 00:00:38,040 Speaker 1: crude were around eighty dollars a barrel, the highest since 12 00:00:38,120 --> 00:00:40,880 Speaker 1: last summer, but in early May they dipped to around 13 00:00:40,960 --> 00:00:44,640 Speaker 1: sixty dollars, the lowest in four years. One side of 14 00:00:44,640 --> 00:00:47,559 Speaker 1: the story is fears over how big oil consumers like 15 00:00:47,720 --> 00:00:51,000 Speaker 1: China might be hit by US trade tariffs, but there's 16 00:00:51,040 --> 00:00:54,000 Speaker 1: also been a change from the countries that produce oil. 17 00:00:54,560 --> 00:00:57,160 Speaker 1: At its latest meeting, the OPEC plus group of oil 18 00:00:57,200 --> 00:01:01,120 Speaker 1: producing nations decided to increase production for a second month 19 00:01:01,120 --> 00:01:01,720 Speaker 1: in a row. 20 00:01:02,080 --> 00:01:05,400 Speaker 2: OPIK has been trying to balance the supply and demand 21 00:01:05,440 --> 00:01:09,080 Speaker 2: and find that the continuously problem with the overproducers. 22 00:01:09,200 --> 00:01:11,240 Speaker 1: Your saudis you're like, why am I going to keep 23 00:01:11,240 --> 00:01:13,960 Speaker 1: subsidizing their output at the expense of mind? 24 00:01:14,040 --> 00:01:17,319 Speaker 3: OPEC always seems to act more cohesively when there's a crisis, 25 00:01:17,319 --> 00:01:18,400 Speaker 3: when they're really up against them. 26 00:01:18,440 --> 00:01:22,560 Speaker 2: The question that everybody is asking is why why did 27 00:01:22,640 --> 00:01:25,840 Speaker 2: OPEK plus decide to increase the amount of barrels that 28 00:01:25,840 --> 00:01:27,920 Speaker 2: they're putting back to the market by more? 29 00:01:28,520 --> 00:01:38,000 Speaker 1: So, here's why oil producers are driving prices lower. Bloomberg 30 00:01:38,080 --> 00:01:39,840 Speaker 1: opinion Columnistavier Blast joins me. 31 00:01:39,959 --> 00:01:40,800 Speaker 4: Now for more. 32 00:01:41,200 --> 00:01:43,800 Speaker 1: Javier, First of all, a bit of context. How much 33 00:01:43,840 --> 00:01:48,280 Speaker 1: influence does OPEC plus have over global oil prices? 34 00:01:48,720 --> 00:01:51,480 Speaker 3: OPEC plus has a lot of influence of where global 35 00:01:51,520 --> 00:01:55,560 Speaker 3: oil prices because it produces, when you count all the barrels, 36 00:01:55,600 --> 00:01:58,280 Speaker 3: more than fifty percent of global oil production on. So 37 00:01:58,360 --> 00:02:01,240 Speaker 3: what it does can push prices up and down. And 38 00:02:01,280 --> 00:02:03,320 Speaker 3: we have seen in the past that the cartel has 39 00:02:03,360 --> 00:02:07,240 Speaker 3: been quite effective in cutting production, in restricting the supply 40 00:02:07,720 --> 00:02:11,440 Speaker 3: to push prices much higher at times. Saudi Arabia semi 41 00:02:11,480 --> 00:02:14,720 Speaker 3: official policy has been to keep prices as close as 42 00:02:14,760 --> 00:02:16,800 Speaker 3: it was possible to one hundred. 43 00:02:16,560 --> 00:02:17,320 Speaker 4: Dollars a barrel. 44 00:02:17,560 --> 00:02:21,280 Speaker 3: So they are very influential, perhaps not as influential as 45 00:02:21,320 --> 00:02:24,560 Speaker 3: in the nineteen seventies, the time of the two oil crisis, 46 00:02:24,639 --> 00:02:28,680 Speaker 3: but it still remained probably the most important factor in 47 00:02:28,720 --> 00:02:29,480 Speaker 3: the oil market. 48 00:02:29,919 --> 00:02:32,080 Speaker 1: And who holds the power within the group. 49 00:02:32,480 --> 00:02:36,639 Speaker 3: Within the group, one country and perhaps another country that 50 00:02:36,919 --> 00:02:40,640 Speaker 3: really hold the power. Those are Saudi Arabia first and foremost, 51 00:02:40,680 --> 00:02:44,040 Speaker 3: and then Russia. They are the number two and number 52 00:02:44,040 --> 00:02:47,640 Speaker 3: three global producers. The largest oil producer nowadays is the 53 00:02:47,720 --> 00:02:51,799 Speaker 3: United States thanks to the shale revolution, but Saudi Arabia 54 00:02:51,960 --> 00:02:56,040 Speaker 3: and Russia pump each about ten million barrels a day. Again, 55 00:02:56,080 --> 00:02:58,760 Speaker 3: when you count all the barrels, not just scrude but 56 00:02:58,840 --> 00:03:02,200 Speaker 3: other liquids, and both are very influenzial. 57 00:03:02,320 --> 00:03:03,840 Speaker 4: They produce more than double. 58 00:03:03,919 --> 00:03:07,480 Speaker 3: The next member of the OPEK class Alliance, and that 59 00:03:07,760 --> 00:03:11,000 Speaker 3: is a group that it was formed about a decade ago, 60 00:03:11,160 --> 00:03:14,480 Speaker 3: exactly at the end of twenty sixteen. And the group 61 00:03:14,639 --> 00:03:18,520 Speaker 3: is the traditional members of the OPEC cartel plus a 62 00:03:18,639 --> 00:03:22,800 Speaker 3: few other countries. That's the plus on OPEK plus that 63 00:03:23,120 --> 00:03:26,919 Speaker 3: decided to join forces. But they are not formal members 64 00:03:27,240 --> 00:03:30,760 Speaker 3: of the oil cartel. It's what we call a club, 65 00:03:31,040 --> 00:03:34,640 Speaker 3: an alliance, or a cartel and a few friends. The 66 00:03:34,720 --> 00:03:38,440 Speaker 3: friends are Russia, Katakhstan and a number of other non 67 00:03:38,440 --> 00:03:42,960 Speaker 3: OPEC producers that in twenty sixteen decided that joining forces 68 00:03:43,000 --> 00:03:46,640 Speaker 3: with Saudi Arabia and the rest of OPEK made sense, 69 00:03:46,720 --> 00:03:49,720 Speaker 3: made economic sense, and they have been until now very 70 00:03:49,760 --> 00:03:54,040 Speaker 3: effective in managing the market. But from time to time, 71 00:03:54,400 --> 00:03:59,600 Speaker 3: not everyone inside this family gets along well and agrees. 72 00:03:59,200 --> 00:04:01,920 Speaker 1: With the decisions. He pointed out in your recent column. 73 00:04:02,040 --> 00:04:05,880 Speaker 1: Cartels exist to drive prices higher. So why then, is 74 00:04:05,960 --> 00:04:08,640 Speaker 1: opek plus increasing supply, which is a move that would 75 00:04:08,720 --> 00:04:09,640 Speaker 1: drive prices down. 76 00:04:10,080 --> 00:04:11,560 Speaker 4: Yes, you are absolutely right. 77 00:04:11,600 --> 00:04:14,160 Speaker 3: I mean, the only reason for having an oil cartel 78 00:04:14,280 --> 00:04:17,040 Speaker 3: is to push the price of the commodity that that 79 00:04:17,120 --> 00:04:18,839 Speaker 3: cartel aims to control higher. 80 00:04:19,000 --> 00:04:21,160 Speaker 4: You do not try to lower prices. 81 00:04:21,160 --> 00:04:24,240 Speaker 3: That will be like a policy of shooting yourself in 82 00:04:24,279 --> 00:04:28,760 Speaker 3: the food and that's not what ragional countries do. However, 83 00:04:29,000 --> 00:04:33,839 Speaker 3: from time to time oil cartels face an economic dilemma, 84 00:04:33,960 --> 00:04:36,839 Speaker 3: one of the members just refuse not to play by 85 00:04:36,920 --> 00:04:40,320 Speaker 3: the rules. And the rules here are the production on quotas. 86 00:04:40,360 --> 00:04:44,880 Speaker 3: The quotas are the official level that the cartel sets 87 00:04:44,920 --> 00:04:48,360 Speaker 3: for each of their members how much oil they need 88 00:04:48,400 --> 00:04:52,120 Speaker 3: to produce on a given month. For opek Plus, the 89 00:04:52,200 --> 00:04:57,040 Speaker 3: group sets an official level for the whole group and 90 00:04:57,080 --> 00:05:01,520 Speaker 3: then quotas for each of their members. And what happened is, 91 00:05:01,520 --> 00:05:04,560 Speaker 3: from time to time one of those countries say well, 92 00:05:04,880 --> 00:05:07,440 Speaker 3: I want to produce more. They may have a new 93 00:05:07,520 --> 00:05:10,680 Speaker 3: oil field coming on a stream, they may need the money. 94 00:05:11,320 --> 00:05:13,960 Speaker 3: And at the end of the day, this is a 95 00:05:13,960 --> 00:05:19,360 Speaker 3: prisoner's dilemma. The cartel can only do one thing when 96 00:05:19,440 --> 00:05:25,120 Speaker 3: someone is cheating is to apply some diplomatic pressure, perhaps 97 00:05:25,240 --> 00:05:30,400 Speaker 3: asking politely nicely, please would you behave to start being 98 00:05:30,440 --> 00:05:33,680 Speaker 3: a bit more forceful on that diplomatic pressure and gone 99 00:05:33,760 --> 00:05:37,040 Speaker 3: publicly we are not happy. This member of the cartel 100 00:05:37,160 --> 00:05:39,600 Speaker 3: is not behaving by the rules, is cheating on us. 101 00:05:40,040 --> 00:05:43,680 Speaker 3: And if that doesn't work, the only other solution is 102 00:05:43,720 --> 00:05:46,760 Speaker 3: to say, well, then we are all gonna do the same. 103 00:05:46,800 --> 00:05:49,160 Speaker 3: We are all gonna produce about the targets. We are 104 00:05:49,200 --> 00:05:52,239 Speaker 3: gonna all produce a lot more. The price of oil 105 00:05:52,400 --> 00:05:55,520 Speaker 3: is gonna go down, and you're gonna pay the financial 106 00:05:55,640 --> 00:05:59,960 Speaker 3: price of directions. Obviously, that is shooting yourself on the foot. 107 00:06:00,320 --> 00:06:04,359 Speaker 3: To attack that cheating country, you need to share the 108 00:06:04,480 --> 00:06:08,279 Speaker 3: pain of much lower oil prices. And the Soudiasts have 109 00:06:08,400 --> 00:06:11,599 Speaker 3: faced that situation in the past. They have faced oil 110 00:06:11,640 --> 00:06:15,440 Speaker 3: producers have cheat on Saudi Arabia and the southdist have 111 00:06:15,920 --> 00:06:19,760 Speaker 3: launched price wars against those cheating countries in the past 112 00:06:20,040 --> 00:06:22,800 Speaker 3: to force them to play by the rules. They did 113 00:06:23,279 --> 00:06:25,960 Speaker 3: in the eighties. Actually in eighty five is the first example. 114 00:06:26,160 --> 00:06:29,479 Speaker 3: They launched effectively a price war against every other member 115 00:06:29,520 --> 00:06:32,960 Speaker 3: in OPEC. They launched a similar price war in nineteen 116 00:06:33,040 --> 00:06:36,719 Speaker 3: ninety eight against Venezuela, and they lounged a price war 117 00:06:36,760 --> 00:06:39,680 Speaker 3: against Russia in twenty twenty, So there is a lot 118 00:06:39,720 --> 00:06:40,920 Speaker 3: of historical president. 119 00:06:41,120 --> 00:06:41,760 Speaker 1: Has it worked. 120 00:06:42,440 --> 00:06:46,120 Speaker 4: It has worked, but it is a very crude. Forgive 121 00:06:46,200 --> 00:06:46,599 Speaker 4: my plan. 122 00:06:46,960 --> 00:06:49,679 Speaker 3: It is a very crude way to manage the oil 123 00:06:49,720 --> 00:06:54,800 Speaker 3: market because the Southeast ultimately got their way, but only 124 00:06:54,839 --> 00:07:00,159 Speaker 3: after significant pain on themselves, and at times it's not 125 00:07:00,480 --> 00:07:05,400 Speaker 3: one hundred percent clear that the Southeast got what they wanted, 126 00:07:05,560 --> 00:07:08,200 Speaker 3: and they were in real trouble. In nineteen ninety eight, 127 00:07:08,920 --> 00:07:13,680 Speaker 3: Saudi Arabia was in massive economic pain. Ultimately they got 128 00:07:13,720 --> 00:07:16,960 Speaker 3: what they wanted, but they almost bound wrapped themselves in 129 00:07:16,960 --> 00:07:17,560 Speaker 3: the process. 130 00:07:17,800 --> 00:07:21,680 Speaker 1: So how much pain can Saudi Arabia take on this front? 131 00:07:21,880 --> 00:07:25,320 Speaker 1: Two bring the members of the group into line here. 132 00:07:25,440 --> 00:07:29,160 Speaker 3: The problem is that the biggest cheating country is Kathakhstan, 133 00:07:29,640 --> 00:07:32,880 Speaker 3: which is not a formal member of OPEK, but only 134 00:07:33,000 --> 00:07:37,320 Speaker 3: part of this plus alliance, and that has a bit 135 00:07:37,360 --> 00:07:40,280 Speaker 3: of at trouble because I don't think that the Saudist 136 00:07:40,320 --> 00:07:44,200 Speaker 3: have nearly as much diplomatic leverage over Kazakhstan as they 137 00:07:44,240 --> 00:07:47,200 Speaker 3: have had with other members, that they are much closer 138 00:07:47,200 --> 00:07:50,800 Speaker 3: than part of the actual god of OPEK. And second, 139 00:07:51,000 --> 00:07:53,520 Speaker 3: what we call the break even prize, so typically the 140 00:07:53,560 --> 00:07:58,360 Speaker 3: price at which the budget balances excluding death each much 141 00:07:58,440 --> 00:08:02,040 Speaker 3: higher in Saudi Arabia Thanakistan. Of course, the Saudist can't 142 00:08:02,040 --> 00:08:05,360 Speaker 3: take on debt, they can't reduce their petro dollar reserves. 143 00:08:05,720 --> 00:08:09,520 Speaker 3: But ultimately you really aim to try to keep your 144 00:08:09,600 --> 00:08:13,440 Speaker 3: budget within the price of oil and not taking too 145 00:08:13,480 --> 00:08:17,520 Speaker 3: much depth. And I think that in this situation Kathakhstan 146 00:08:17,640 --> 00:08:21,200 Speaker 3: can take a lot more financial pain than Saudi Arabia. 147 00:08:21,800 --> 00:08:23,960 Speaker 4: This could be quite the standoff. It is a. 148 00:08:23,960 --> 00:08:27,240 Speaker 3: Standoff, and so far what we are seeing is kataks 149 00:08:27,240 --> 00:08:30,760 Speaker 3: Stan so far is getting the pressure. Clearly they are 150 00:08:30,840 --> 00:08:34,720 Speaker 3: noticing it, but they are saying yeah, we hear you, 151 00:08:35,160 --> 00:08:38,760 Speaker 3: which almost sounds to me the same thing that a 152 00:08:38,960 --> 00:08:43,480 Speaker 3: teenager respond to their parents when their parents are asking 153 00:08:43,800 --> 00:08:47,840 Speaker 3: the teenager to clean their room. Yes, mother, I hear you, 154 00:08:48,440 --> 00:08:52,120 Speaker 3: and the room remains untidy for the next three months. 155 00:08:52,400 --> 00:08:55,640 Speaker 1: That's one side of the untidy room. The other factor 156 00:08:55,679 --> 00:08:57,920 Speaker 1: in all of this when I'm thinking about prices is 157 00:08:57,960 --> 00:09:00,640 Speaker 1: the demand side. What is just briefly the current thinking 158 00:09:00,679 --> 00:09:02,880 Speaker 1: about what sort of effect the trade war and the 159 00:09:02,880 --> 00:09:04,880 Speaker 1: effects on growth could have on an oil demand. 160 00:09:05,280 --> 00:09:08,600 Speaker 3: Before the trade war started, the consensus in the oil 161 00:09:08,640 --> 00:09:11,560 Speaker 3: market war that global oil demand was going to growth 162 00:09:11,640 --> 00:09:15,280 Speaker 3: about one percent, so that's roughly about a million borrows 163 00:09:15,320 --> 00:09:18,080 Speaker 3: a day, or to put it in equal terms to 164 00:09:18,120 --> 00:09:21,080 Speaker 3: an oil producer, we were going to need an Extralivia 165 00:09:21,280 --> 00:09:24,720 Speaker 3: in twenty twenty five. At the moment, everyone is reducing 166 00:09:24,760 --> 00:09:29,559 Speaker 3: those forecasts, and the range goes between the most optimistic 167 00:09:29,679 --> 00:09:31,960 Speaker 3: that they think that we're going to have an oil 168 00:09:32,000 --> 00:09:34,800 Speaker 3: demand of our around seven hundred thousand borrows a day 169 00:09:34,880 --> 00:09:38,960 Speaker 3: is thirty percent reduction in the forecast, to people that 170 00:09:38,960 --> 00:09:42,199 Speaker 3: they are beginning to think, well, this is really getting 171 00:09:42,320 --> 00:09:42,959 Speaker 3: very slow. 172 00:09:43,480 --> 00:09:45,280 Speaker 4: The trade war remains unresolved. 173 00:09:45,360 --> 00:09:47,800 Speaker 3: Yes, the Chinese and the Americans are talking, but they 174 00:09:47,800 --> 00:09:51,160 Speaker 3: are talking about talks, so probably this is going to 175 00:09:51,200 --> 00:09:54,160 Speaker 3: be worse, and they are expecting oil demand to slow 176 00:09:54,240 --> 00:09:57,720 Speaker 3: down to about three hundred to five hundred thousand boroughs 177 00:09:57,720 --> 00:10:01,520 Speaker 3: a day. Still everyone saw so far is talking about 178 00:10:01,559 --> 00:10:05,040 Speaker 3: a slowdown in the growth. We are not talking about 179 00:10:05,040 --> 00:10:08,520 Speaker 3: a contraction in oil demand, which we saw obviously during 180 00:10:08,559 --> 00:10:11,959 Speaker 3: the pandemic, but that was an unprecedented situation where everyone 181 00:10:12,080 --> 00:10:15,080 Speaker 3: was not traveling. But we saw a contraction in oil 182 00:10:15,120 --> 00:10:18,079 Speaker 3: demand back in two thousand and eight two thousand and 183 00:10:18,200 --> 00:10:20,960 Speaker 3: nine during the global financial crisis. So if the global 184 00:10:21,000 --> 00:10:24,200 Speaker 3: economy is slows down a lot, we may move from 185 00:10:24,440 --> 00:10:28,160 Speaker 3: a slow down in oil demand to an actual contraction, which, 186 00:10:28,280 --> 00:10:33,040 Speaker 3: together with Opek fighting internal dissidents, that could be a 187 00:10:33,080 --> 00:10:35,000 Speaker 3: recipe for much lower oil prices. 188 00:10:35,400 --> 00:10:38,120 Speaker 1: Okay, heavier Plaspoomberg Opinion columnsts. Thank you very much, and 189 00:10:38,120 --> 00:10:40,600 Speaker 1: you can read Hava's latest work at Bloomberg dot com 190 00:10:40,640 --> 00:10:44,280 Speaker 1: Forward slash Opinion. For more explanations like this from our 191 00:10:44,280 --> 00:10:46,840 Speaker 1: team of three thousand journalists and analysts around the world, 192 00:10:46,960 --> 00:10:51,800 Speaker 1: go to Bloomberg dot com Forward Slash Explainers. I'm Stephen Carroll. 193 00:10:51,960 --> 00:10:54,320 Speaker 1: This is here's why. I'll be back next week with more. 194 00:10:54,480 --> 00:10:55,240 Speaker 1: Thanks for listening.