WEBVTT - Here's Why Oil Producers Are Driving Prices Lower 0:00:02.560 --> 0:00:10.040 Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll and 0:00:10.080 --> 0:00:12.680 this is Here's Why, where we take one new story 0:00:12.720 --> 0:00:14.760 and explain it in just a few minutes with our 0:00:14.800 --> 0:00:16.400 experts here at Bloomberg. 0:00:19.880 --> 0:00:22.200 Take a look at the price of energy this morning. 0:00:22.200 --> 0:00:24.560 Brent has slipped through sixty dollars. Fifty nine dollars is 0:00:24.600 --> 0:00:27.200 where we're treating. We are basically back to a four 0:00:27.280 --> 0:00:28.240 year low again. 0:00:28.520 --> 0:00:31.440 When US President Donald Trump was inaugurated to his second 0:00:31.560 --> 0:00:34.840 term in January, oil prices on the international benchmark Brent 0:00:34.960 --> 0:00:38.040 crude were around eighty dollars a barrel, the highest since 0:00:38.120 --> 0:00:40.880 last summer, but in early May they dipped to around 0:00:40.960 --> 0:00:44.640 sixty dollars, the lowest in four years. One side of 0:00:44.640 --> 0:00:47.559 the story is fears over how big oil consumers like 0:00:47.720 --> 0:00:51.000 China might be hit by US trade tariffs, but there's 0:00:51.040 --> 0:00:54.000 also been a change from the countries that produce oil. 0:00:54.560 --> 0:00:57.160 At its latest meeting, the OPEC plus group of oil 0:00:57.200 --> 0:01:01.120 producing nations decided to increase production for a second month 0:01:01.120 --> 0:01:01.720 in a row. 0:01:02.080 --> 0:01:05.400 OPIK has been trying to balance the supply and demand 0:01:05.440 --> 0:01:09.080 and find that the continuously problem with the overproducers. 0:01:09.200 --> 0:01:11.240 Your saudis you're like, why am I going to keep 0:01:11.240 --> 0:01:13.960 subsidizing their output at the expense of mind? 0:01:14.040 --> 0:01:17.319 OPEC always seems to act more cohesively when there's a crisis, 0:01:17.319 --> 0:01:18.400 when they're really up against them. 0:01:18.440 --> 0:01:22.560 The question that everybody is asking is why why did 0:01:22.640 --> 0:01:25.840 OPEK plus decide to increase the amount of barrels that 0:01:25.840 --> 0:01:27.920 they're putting back to the market by more? 0:01:28.520 --> 0:01:38.000 So, here's why oil producers are driving prices lower. Bloomberg 0:01:38.080 --> 0:01:39.840 opinion Columnistavier Blast joins me. 0:01:39.959 --> 0:01:40.800 Now for more. 0:01:41.200 --> 0:01:43.800 Javier, First of all, a bit of context. How much 0:01:43.840 --> 0:01:48.280 influence does OPEC plus have over global oil prices? 0:01:48.720 --> 0:01:51.480 OPEC plus has a lot of influence of where global 0:01:51.520 --> 0:01:55.560 oil prices because it produces, when you count all the barrels, 0:01:55.600 --> 0:01:58.280 more than fifty percent of global oil production on. So 0:01:58.360 --> 0:02:01.240 what it does can push prices up and down. And 0:02:01.280 --> 0:02:03.320 we have seen in the past that the cartel has 0:02:03.360 --> 0:02:07.240 been quite effective in cutting production, in restricting the supply 0:02:07.720 --> 0:02:11.440 to push prices much higher at times. Saudi Arabia semi 0:02:11.480 --> 0:02:14.720 official policy has been to keep prices as close as 0:02:14.760 --> 0:02:16.800 it was possible to one hundred. 0:02:16.560 --> 0:02:17.320 Dollars a barrel. 0:02:17.560 --> 0:02:21.280 So they are very influential, perhaps not as influential as 0:02:21.320 --> 0:02:24.560 in the nineteen seventies, the time of the two oil crisis, 0:02:24.639 --> 0:02:28.680 but it still remained probably the most important factor in 0:02:28.720 --> 0:02:29.480 the oil market. 0:02:29.919 --> 0:02:32.080 And who holds the power within the group. 0:02:32.480 --> 0:02:36.639 Within the group, one country and perhaps another country that 0:02:36.919 --> 0:02:40.640 really hold the power. Those are Saudi Arabia first and foremost, 0:02:40.680 --> 0:02:44.040 and then Russia. They are the number two and number 0:02:44.040 --> 0:02:47.640 three global producers. The largest oil producer nowadays is the 0:02:47.720 --> 0:02:51.799 United States thanks to the shale revolution, but Saudi Arabia 0:02:51.960 --> 0:02:56.040 and Russia pump each about ten million barrels a day. Again, 0:02:56.080 --> 0:02:58.760 when you count all the barrels, not just scrude but 0:02:58.840 --> 0:03:02.200 other liquids, and both are very influenzial. 0:03:02.320 --> 0:03:03.840 They produce more than double. 0:03:03.919 --> 0:03:07.480 The next member of the OPEK class Alliance, and that 0:03:07.760 --> 0:03:11.000 is a group that it was formed about a decade ago, 0:03:11.160 --> 0:03:14.480 exactly at the end of twenty sixteen. And the group 0:03:14.639 --> 0:03:18.520 is the traditional members of the OPEC cartel plus a 0:03:18.639 --> 0:03:22.800 few other countries. That's the plus on OPEK plus that 0:03:23.120 --> 0:03:26.919 decided to join forces. But they are not formal members 0:03:27.240 --> 0:03:30.760 of the oil cartel. It's what we call a club, 0:03:31.040 --> 0:03:34.640 an alliance, or a cartel and a few friends. The 0:03:34.720 --> 0:03:38.440 friends are Russia, Katakhstan and a number of other non 0:03:38.440 --> 0:03:42.960 OPEC producers that in twenty sixteen decided that joining forces 0:03:43.000 --> 0:03:46.640 with Saudi Arabia and the rest of OPEK made sense, 0:03:46.720 --> 0:03:49.720 made economic sense, and they have been until now very 0:03:49.760 --> 0:03:54.040 effective in managing the market. But from time to time, 0:03:54.400 --> 0:03:59.600 not everyone inside this family gets along well and agrees. 0:03:59.200 --> 0:04:01.920 With the decisions. He pointed out in your recent column. 0:04:02.040 --> 0:04:05.880 Cartels exist to drive prices higher. So why then, is 0:04:05.960 --> 0:04:08.640 opek plus increasing supply, which is a move that would 0:04:08.720 --> 0:04:09.640 drive prices down. 0:04:10.080 --> 0:04:11.560 Yes, you are absolutely right. 0:04:11.600 --> 0:04:14.160 I mean, the only reason for having an oil cartel 0:04:14.280 --> 0:04:17.040 is to push the price of the commodity that that 0:04:17.120 --> 0:04:18.839 cartel aims to control higher. 0:04:19.000 --> 0:04:21.160 You do not try to lower prices. 0:04:21.160 --> 0:04:24.240 That will be like a policy of shooting yourself in 0:04:24.279 --> 0:04:28.760 the food and that's not what ragional countries do. However, 0:04:29.000 --> 0:04:33.839 from time to time oil cartels face an economic dilemma, 0:04:33.960 --> 0:04:36.839 one of the members just refuse not to play by 0:04:36.920 --> 0:04:40.320 the rules. And the rules here are the production on quotas. 0:04:40.360 --> 0:04:44.880 The quotas are the official level that the cartel sets 0:04:44.920 --> 0:04:48.360 for each of their members how much oil they need 0:04:48.400 --> 0:04:52.120 to produce on a given month. For opek Plus, the 0:04:52.200 --> 0:04:57.040 group sets an official level for the whole group and 0:04:57.080 --> 0:05:01.520 then quotas for each of their members. And what happened is, 0:05:01.520 --> 0:05:04.560 from time to time one of those countries say well, 0:05:04.880 --> 0:05:07.440 I want to produce more. They may have a new 0:05:07.520 --> 0:05:10.680 oil field coming on a stream, they may need the money. 0:05:11.320 --> 0:05:13.960 And at the end of the day, this is a 0:05:13.960 --> 0:05:19.360 prisoner's dilemma. The cartel can only do one thing when 0:05:19.440 --> 0:05:25.120 someone is cheating is to apply some diplomatic pressure, perhaps 0:05:25.240 --> 0:05:30.400 asking politely nicely, please would you behave to start being 0:05:30.440 --> 0:05:33.680 a bit more forceful on that diplomatic pressure and gone 0:05:33.760 --> 0:05:37.040 publicly we are not happy. This member of the cartel 0:05:37.160 --> 0:05:39.600 is not behaving by the rules, is cheating on us. 0:05:40.040 --> 0:05:43.680 And if that doesn't work, the only other solution is 0:05:43.720 --> 0:05:46.760 to say, well, then we are all gonna do the same. 0:05:46.800 --> 0:05:49.160 We are all gonna produce about the targets. We are 0:05:49.200 --> 0:05:52.239 gonna all produce a lot more. The price of oil 0:05:52.400 --> 0:05:55.520 is gonna go down, and you're gonna pay the financial 0:05:55.640 --> 0:05:59.960 price of directions. Obviously, that is shooting yourself on the foot. 0:06:00.320 --> 0:06:04.359 To attack that cheating country, you need to share the 0:06:04.480 --> 0:06:08.279 pain of much lower oil prices. And the Soudiasts have 0:06:08.400 --> 0:06:11.599 faced that situation in the past. They have faced oil 0:06:11.640 --> 0:06:15.440 producers have cheat on Saudi Arabia and the southdist have 0:06:15.920 --> 0:06:19.760 launched price wars against those cheating countries in the past 0:06:20.040 --> 0:06:22.800 to force them to play by the rules. They did 0:06:23.279 --> 0:06:25.960 in the eighties. Actually in eighty five is the first example. 0:06:26.160 --> 0:06:29.479 They launched effectively a price war against every other member 0:06:29.520 --> 0:06:32.960 in OPEC. They launched a similar price war in nineteen 0:06:33.040 --> 0:06:36.719 ninety eight against Venezuela, and they lounged a price war 0:06:36.760 --> 0:06:39.680 against Russia in twenty twenty, So there is a lot 0:06:39.720 --> 0:06:40.920 of historical president. 0:06:41.120 --> 0:06:41.760 Has it worked. 0:06:42.440 --> 0:06:46.120 It has worked, but it is a very crude. Forgive 0:06:46.200 --> 0:06:46.599 my plan. 0:06:46.960 --> 0:06:49.679 It is a very crude way to manage the oil 0:06:49.720 --> 0:06:54.800 market because the Southeast ultimately got their way, but only 0:06:54.839 --> 0:07:00.159 after significant pain on themselves, and at times it's not 0:07:00.480 --> 0:07:05.400 one hundred percent clear that the Southeast got what they wanted, 0:07:05.560 --> 0:07:08.200 and they were in real trouble. In nineteen ninety eight, 0:07:08.920 --> 0:07:13.680 Saudi Arabia was in massive economic pain. Ultimately they got 0:07:13.720 --> 0:07:16.960 what they wanted, but they almost bound wrapped themselves in 0:07:16.960 --> 0:07:17.560 the process. 0:07:17.800 --> 0:07:21.680 So how much pain can Saudi Arabia take on this front? 0:07:21.880 --> 0:07:25.320 Two bring the members of the group into line here. 0:07:25.440 --> 0:07:29.160 The problem is that the biggest cheating country is Kathakhstan, 0:07:29.640 --> 0:07:32.880 which is not a formal member of OPEK, but only 0:07:33.000 --> 0:07:37.320 part of this plus alliance, and that has a bit 0:07:37.360 --> 0:07:40.280 of at trouble because I don't think that the Saudist 0:07:40.320 --> 0:07:44.200 have nearly as much diplomatic leverage over Kazakhstan as they 0:07:44.240 --> 0:07:47.200 have had with other members, that they are much closer 0:07:47.200 --> 0:07:50.800 than part of the actual god of OPEK. And second, 0:07:51.000 --> 0:07:53.520 what we call the break even prize, so typically the 0:07:53.560 --> 0:07:58.360 price at which the budget balances excluding death each much 0:07:58.440 --> 0:08:02.040 higher in Saudi Arabia Thanakistan. Of course, the Saudist can't 0:08:02.040 --> 0:08:05.360 take on debt, they can't reduce their petro dollar reserves. 0:08:05.720 --> 0:08:09.520 But ultimately you really aim to try to keep your 0:08:09.600 --> 0:08:13.440 budget within the price of oil and not taking too 0:08:13.480 --> 0:08:17.520 much depth. And I think that in this situation Kathakhstan 0:08:17.640 --> 0:08:21.200 can take a lot more financial pain than Saudi Arabia. 0:08:21.800 --> 0:08:23.960 This could be quite the standoff. It is a. 0:08:23.960 --> 0:08:27.240 Standoff, and so far what we are seeing is kataks 0:08:27.240 --> 0:08:30.760 Stan so far is getting the pressure. Clearly they are 0:08:30.840 --> 0:08:34.720 noticing it, but they are saying yeah, we hear you, 0:08:35.160 --> 0:08:38.760 which almost sounds to me the same thing that a 0:08:38.960 --> 0:08:43.480 teenager respond to their parents when their parents are asking 0:08:43.800 --> 0:08:47.840 the teenager to clean their room. Yes, mother, I hear you, 0:08:48.440 --> 0:08:52.120 and the room remains untidy for the next three months. 0:08:52.400 --> 0:08:55.640 That's one side of the untidy room. The other factor 0:08:55.679 --> 0:08:57.920 in all of this when I'm thinking about prices is 0:08:57.960 --> 0:09:00.640 the demand side. What is just briefly the current thinking 0:09:00.679 --> 0:09:02.880 about what sort of effect the trade war and the 0:09:02.880 --> 0:09:04.880 effects on growth could have on an oil demand. 0:09:05.280 --> 0:09:08.600 Before the trade war started, the consensus in the oil 0:09:08.640 --> 0:09:11.560 market war that global oil demand was going to growth 0:09:11.640 --> 0:09:15.280 about one percent, so that's roughly about a million borrows 0:09:15.320 --> 0:09:18.080 a day, or to put it in equal terms to 0:09:18.120 --> 0:09:21.080 an oil producer, we were going to need an Extralivia 0:09:21.280 --> 0:09:24.720 in twenty twenty five. At the moment, everyone is reducing 0:09:24.760 --> 0:09:29.559 those forecasts, and the range goes between the most optimistic 0:09:29.679 --> 0:09:31.960 that they think that we're going to have an oil 0:09:32.000 --> 0:09:34.800 demand of our around seven hundred thousand borrows a day 0:09:34.880 --> 0:09:38.960 is thirty percent reduction in the forecast, to people that 0:09:38.960 --> 0:09:42.199 they are beginning to think, well, this is really getting 0:09:42.320 --> 0:09:42.959 very slow. 0:09:43.480 --> 0:09:45.280 The trade war remains unresolved. 0:09:45.360 --> 0:09:47.800 Yes, the Chinese and the Americans are talking, but they 0:09:47.800 --> 0:09:51.160 are talking about talks, so probably this is going to 0:09:51.200 --> 0:09:54.160 be worse, and they are expecting oil demand to slow 0:09:54.240 --> 0:09:57.720 down to about three hundred to five hundred thousand boroughs 0:09:57.720 --> 0:10:01.520 a day. Still everyone saw so far is talking about 0:10:01.559 --> 0:10:05.040 a slowdown in the growth. We are not talking about 0:10:05.040 --> 0:10:08.520 a contraction in oil demand, which we saw obviously during 0:10:08.559 --> 0:10:11.959 the pandemic, but that was an unprecedented situation where everyone 0:10:12.080 --> 0:10:15.080 was not traveling. But we saw a contraction in oil 0:10:15.120 --> 0:10:18.079 demand back in two thousand and eight two thousand and 0:10:18.200 --> 0:10:20.960 nine during the global financial crisis. So if the global 0:10:21.000 --> 0:10:24.200 economy is slows down a lot, we may move from 0:10:24.440 --> 0:10:28.160 a slow down in oil demand to an actual contraction, which, 0:10:28.280 --> 0:10:33.040 together with Opek fighting internal dissidents, that could be a 0:10:33.080 --> 0:10:35.000 recipe for much lower oil prices. 0:10:35.400 --> 0:10:38.120 Okay, heavier Plaspoomberg Opinion columnsts. Thank you very much, and 0:10:38.120 --> 0:10:40.600 you can read Hava's latest work at Bloomberg dot com 0:10:40.640 --> 0:10:44.280 Forward slash Opinion. For more explanations like this from our 0:10:44.280 --> 0:10:46.840 team of three thousand journalists and analysts around the world, 0:10:46.960 --> 0:10:51.800 go to Bloomberg dot com Forward Slash Explainers. I'm Stephen Carroll. 0:10:51.960 --> 0:10:54.320 This is here's why. I'll be back next week with more. 0:10:54.480 --> 0:10:55.240 Thanks for listening.