Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll and
Speaker 1: this is Here's Why, where we take one new story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg.
Speaker 2: Take a look at the price of energy this morning.
Speaker 2: Brent has slipped through sixty dollars. Fifty nine dollars is
Speaker 2: where we're treating. We are basically back to a four
Speaker 2: year low again.
Speaker 1: When US President Donald Trump was inaugurated to his second
Speaker 1: term in January, oil prices on the international benchmark Brent
Speaker 1: crude were around eighty dollars a barrel, the highest since
Speaker 1: last summer, but in early May they dipped to around
Speaker 1: sixty dollars, the lowest in four years. One side of
Speaker 1: the story is fears over how big oil consumers like
Speaker 1: China might be hit by US trade tariffs, but there's
Speaker 1: also been a change from the countries that produce oil.
Speaker 1: At its latest meeting, the OPEC plus group of oil
Speaker 1: producing nations decided to increase production for a second month
Speaker 1: in a row.
Speaker 2: OPIK has been trying to balance the supply and demand
Speaker 2: and find that the continuously problem with the overproducers.
Speaker 1: Your saudis you're like, why am I going to keep
Speaker 1: subsidizing their output at the expense of mind?
Speaker 3: OPEC always seems to act more cohesively when there's a crisis,
Speaker 3: when they're really up against them.
Speaker 2: The question that everybody is asking is why why did
Speaker 2: OPEK plus decide to increase the amount of barrels that
Speaker 2: they're putting back to the market by more?
Speaker 1: So, here's why oil producers are driving prices lower. Bloomberg
Speaker 1: opinion Columnistavier Blast joins me.
Speaker 4: Now for more.
Speaker 1: Javier, First of all, a bit of context. How much
Speaker 1: influence does OPEC plus have over global oil prices?
Speaker 3: OPEC plus has a lot of influence of where global
Speaker 3: oil prices because it produces, when you count all the barrels,
Speaker 3: more than fifty percent of global oil production on. So
Speaker 3: what it does can push prices up and down. And
Speaker 3: we have seen in the past that the cartel has
Speaker 3: been quite effective in cutting production, in restricting the supply
Speaker 3: to push prices much higher at times. Saudi Arabia semi
Speaker 3: official policy has been to keep prices as close as
Speaker 3: it was possible to one hundred.
Speaker 4: Dollars a barrel.
Speaker 3: So they are very influential, perhaps not as influential as
Speaker 3: in the nineteen seventies, the time of the two oil crisis,
Speaker 3: but it still remained probably the most important factor in
Speaker 3: the oil market.
Speaker 1: And who holds the power within the group.
Speaker 3: Within the group, one country and perhaps another country that
Speaker 3: really hold the power. Those are Saudi Arabia first and foremost,
Speaker 3: and then Russia. They are the number two and number
Speaker 3: three global producers. The largest oil producer nowadays is the
Speaker 3: United States thanks to the shale revolution, but Saudi Arabia
Speaker 3: and Russia pump each about ten million barrels a day. Again,
Speaker 3: when you count all the barrels, not just scrude but
Speaker 3: other liquids, and both are very influenzial.
Speaker 4: They produce more than double.
Speaker 3: The next member of the OPEK class Alliance, and that
Speaker 3: is a group that it was formed about a decade ago,
Speaker 3: exactly at the end of twenty sixteen. And the group
Speaker 3: is the traditional members of the OPEC cartel plus a
Speaker 3: few other countries. That's the plus on OPEK plus that
Speaker 3: decided to join forces. But they are not formal members
Speaker 3: of the oil cartel. It's what we call a club,
Speaker 3: an alliance, or a cartel and a few friends. The
Speaker 3: friends are Russia, Katakhstan and a number of other non
Speaker 3: OPEC producers that in twenty sixteen decided that joining forces
Speaker 3: with Saudi Arabia and the rest of OPEK made sense,
Speaker 3: made economic sense, and they have been until now very
Speaker 3: effective in managing the market. But from time to time,
Speaker 3: not everyone inside this family gets along well and agrees.
Speaker 1: With the decisions. He pointed out in your recent column.
Speaker 1: Cartels exist to drive prices higher. So why then, is
Speaker 1: opek plus increasing supply, which is a move that would
Speaker 1: drive prices down.
Speaker 4: Yes, you are absolutely right.
Speaker 3: I mean, the only reason for having an oil cartel
Speaker 3: is to push the price of the commodity that that
Speaker 3: cartel aims to control higher.
Speaker 4: You do not try to lower prices.
Speaker 3: That will be like a policy of shooting yourself in
Speaker 3: the food and that's not what ragional countries do. However,
Speaker 3: from time to time oil cartels face an economic dilemma,
Speaker 3: one of the members just refuse not to play by
Speaker 3: the rules. And the rules here are the production on quotas.
Speaker 3: The quotas are the official level that the cartel sets
Speaker 3: for each of their members how much oil they need
Speaker 3: to produce on a given month. For opek Plus, the
Speaker 3: group sets an official level for the whole group and
Speaker 3: then quotas for each of their members. And what happened is,
Speaker 3: from time to time one of those countries say well,
Speaker 3: I want to produce more. They may have a new
Speaker 3: oil field coming on a stream, they may need the money.
Speaker 3: And at the end of the day, this is a
Speaker 3: prisoner's dilemma. The cartel can only do one thing when
Speaker 3: someone is cheating is to apply some diplomatic pressure, perhaps
Speaker 3: asking politely nicely, please would you behave to start being
Speaker 3: a bit more forceful on that diplomatic pressure and gone
Speaker 3: publicly we are not happy. This member of the cartel
Speaker 3: is not behaving by the rules, is cheating on us.
Speaker 3: And if that doesn't work, the only other solution is
Speaker 3: to say, well, then we are all gonna do the same.
Speaker 3: We are all gonna produce about the targets. We are
Speaker 3: gonna all produce a lot more. The price of oil
Speaker 3: is gonna go down, and you're gonna pay the financial
Speaker 3: price of directions. Obviously, that is shooting yourself on the foot.
Speaker 3: To attack that cheating country, you need to share the
Speaker 3: pain of much lower oil prices. And the Soudiasts have
Speaker 3: faced that situation in the past. They have faced oil
Speaker 3: producers have cheat on Saudi Arabia and the southdist have
Speaker 3: launched price wars against those cheating countries in the past
Speaker 3: to force them to play by the rules. They did
Speaker 3: in the eighties. Actually in eighty five is the first example.
Speaker 3: They launched effectively a price war against every other member
Speaker 3: in OPEC. They launched a similar price war in nineteen
Speaker 3: ninety eight against Venezuela, and they lounged a price war
Speaker 3: against Russia in twenty twenty, So there is a lot
Speaker 3: of historical president.
Speaker 1: Has it worked.
Speaker 4: It has worked, but it is a very crude. Forgive
Speaker 4: my plan.
Speaker 3: It is a very crude way to manage the oil
Speaker 3: market because the Southeast ultimately got their way, but only
Speaker 3: after significant pain on themselves, and at times it's not
Speaker 3: one hundred percent clear that the Southeast got what they wanted,
Speaker 3: and they were in real trouble. In nineteen ninety eight,
Speaker 3: Saudi Arabia was in massive economic pain. Ultimately they got
Speaker 3: what they wanted, but they almost bound wrapped themselves in
Speaker 3: the process.
Speaker 1: So how much pain can Saudi Arabia take on this front?
Speaker 1: Two bring the members of the group into line here.
Speaker 3: The problem is that the biggest cheating country is Kathakhstan,
Speaker 3: which is not a formal member of OPEK, but only
Speaker 3: part of this plus alliance, and that has a bit
Speaker 3: of at trouble because I don't think that the Saudist
Speaker 3: have nearly as much diplomatic leverage over Kazakhstan as they
Speaker 3: have had with other members, that they are much closer
Speaker 3: than part of the actual god of OPEK. And second,
Speaker 3: what we call the break even prize, so typically the
Speaker 3: price at which the budget balances excluding death each much
Speaker 3: higher in Saudi Arabia Thanakistan. Of course, the Saudist can't
Speaker 3: take on debt, they can't reduce their petro dollar reserves.
Speaker 3: But ultimately you really aim to try to keep your
Speaker 3: budget within the price of oil and not taking too
Speaker 3: much depth. And I think that in this situation Kathakhstan
Speaker 3: can take a lot more financial pain than Saudi Arabia.
Speaker 4: This could be quite the standoff. It is a.
Speaker 3: Standoff, and so far what we are seeing is kataks
Speaker 3: Stan so far is getting the pressure. Clearly they are
Speaker 3: noticing it, but they are saying yeah, we hear you,
Speaker 3: which almost sounds to me the same thing that a
Speaker 3: teenager respond to their parents when their parents are asking
Speaker 3: the teenager to clean their room. Yes, mother, I hear you,
Speaker 3: and the room remains untidy for the next three months.
Speaker 1: That's one side of the untidy room. The other factor
Speaker 1: in all of this when I'm thinking about prices is
Speaker 1: the demand side. What is just briefly the current thinking
Speaker 1: about what sort of effect the trade war and the
Speaker 1: effects on growth could have on an oil demand.
Speaker 3: Before the trade war started, the consensus in the oil
Speaker 3: market war that global oil demand was going to growth
Speaker 3: about one percent, so that's roughly about a million borrows
Speaker 3: a day, or to put it in equal terms to
Speaker 3: an oil producer, we were going to need an Extralivia
Speaker 3: in twenty twenty five. At the moment, everyone is reducing
Speaker 3: those forecasts, and the range goes between the most optimistic
Speaker 3: that they think that we're going to have an oil
Speaker 3: demand of our around seven hundred thousand borrows a day
Speaker 3: is thirty percent reduction in the forecast, to people that
Speaker 3: they are beginning to think, well, this is really getting
Speaker 3: very slow.
Speaker 4: The trade war remains unresolved.
Speaker 3: Yes, the Chinese and the Americans are talking, but they
Speaker 3: are talking about talks, so probably this is going to
Speaker 3: be worse, and they are expecting oil demand to slow
Speaker 3: down to about three hundred to five hundred thousand boroughs
Speaker 3: a day. Still everyone saw so far is talking about
Speaker 3: a slowdown in the growth. We are not talking about
Speaker 3: a contraction in oil demand, which we saw obviously during
Speaker 3: the pandemic, but that was an unprecedented situation where everyone
Speaker 3: was not traveling. But we saw a contraction in oil
Speaker 3: demand back in two thousand and eight two thousand and
Speaker 3: nine during the global financial crisis. So if the global
Speaker 3: economy is slows down a lot, we may move from
Speaker 3: a slow down in oil demand to an actual contraction, which,
Speaker 3: together with Opek fighting internal dissidents, that could be a
Speaker 3: recipe for much lower oil prices.
Speaker 1: Okay, heavier Plaspoomberg Opinion columnsts. Thank you very much, and
Speaker 1: you can read Hava's latest work at Bloomberg dot com
Speaker 1: Forward slash Opinion. For more explanations like this from our
Speaker 1: team of three thousand journalists and analysts around the world,
Speaker 1: go to Bloomberg dot com Forward Slash Explainers. I'm Stephen Carroll.
Speaker 1: This is here's why. I'll be back next week with more.
Speaker 1: Thanks for listening.