Commentary Type

The Upward March of Oil Prices Shows Few Signs of Stopping


Brent oil, the world standard, relentlessly climbed from a low of $30 per barrel early in 2016 to above $80 per barrel today. A year ago, when Brent was around $55 barrel, some pundits foresaw a return to the 2016 lows; others saw the price languishing in the $50-$60 per barrel range.

Bearish forecasts reflected a tepid outlook for the world economy and expectations of fracking on an ever-larger scale coupled with new finds from deep-water drilling. Few observers reckoned that Brent might again exceed $100 per barrel, as it did between 2011 and 2014, or even reach $80.

Several factors combined to upset these bearish forecasts. On the demand side, massive tax cuts, taking effect in 2018, sparked the US economy with global spillovers. Meanwhile, easy monetary policy in all advanced countries further promoted global growth.

On the supply side, the fracking rig count dropped dramatically when oil prices plunged in 2015 and has recovered only slowly since then. Fracking makes a much larger contribution to natural gas than to oil supply.

US oil production continues to grow, but at a modest pace. Meanwhile, the major oil producers have been cautious about betting $3 billion or more on deep-water drilling off the coast of Brazil or Africa.

President Trump's renewed sanctions may reduce Iranian oil exports by as much as 1 million barrels a day as European buyers reluctantly cut their purchases. This shock gives Russia and Saudi Arabia even stronger control of world oil supply.

In June 2018, the duopolists agreed to increase oil production by 1 million barrels a day to ensure "stability" in world oil markets. But "stability" has different meanings to oil consumers and oil producers.

Producers almost always want higher oil prices, but they also want to deflect the political backlash that accompanies higher prices. The result is doublespeak press briefings—phony calls for "stability" and talk of larger output, while quietly reaching agreement on supply limitations that will drive Brent higher.

Make no mistake: Higher oil prices bring joy to multiple influential actors. Russia and Saudi Arabia, obviously, but also Texas, Oklahoma, and other energy states, plus all the conventional oil and fracking firms.

Even Iran has reason to be happy: Its oil exports will perhaps be cut from 3 million to 2 million barrels per day, but the 50-percent rise in Brent means that Iran is just as well off financially.

Not to be forgotten in the joy club are renewable energy producers—solar and wind—along with environmentalists who see carbon emissions as humanity's biggest threat.

Now that Brent has topped $80 per barrel and West Texas Intermediate (WTI) exceeds $70 per barrel, what credible counterforces can keep Brent from topping $90?

In his UN speech on Tuesday, President Trump denounced the Organization of Petroleum Exporting Countries (OPEC) for "ripping off the rest of the world." Other US presidents and Western political leaders have harbored similar thoughts, without such vivid expression.

But oral denunciation counts for little against the self-interest of oil producers and their allies. If the United States is serious about arresting the further rise of oil prices, it must either take the lead in curbing demand (higher gas taxes) or enhancing supply (releases from the Strategic Petroleum Reserve).

Since neither action is likely, the upward march of Brent seems a better bet.

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