Suddenly, it’s all turning around as the world once again becomes extremely thirsty for oil, after two years of a glut that caused prices to dive and triggering an existentialist crisis for oil-producing countries. With the onset of autumn and countries preparing to stock up their fuel needs for winter, rapid developments took place that severely impacted the global energy markets.
Some of these were triggered by the recovery of many economies from the pandemic, thanks to rapid spread of vaccinations and the discovery of new medicines to treat the virus. Consequently, a sudden rise in demand for goods and services, especially oil and gas, has been reported, but with supplies inadequate to meet this demand.
This resulted in a significant increase in oil and gas prices, of between 25-30 per cent from September, and more so as the OPEC+ countries did not respond to the US pressures to increase production. The US President Joe Biden’s policy decisions too have contributed to deepening the crisis after he decided to reduce investments in shale oil and gas fields, which led to a surge in US oil imports and worsening the supply and demand balances in global markets.
This despite the fact that the US remains one of the largest gas exporters in the world during the administration of President Donald Trump. The Biden administration has justified its approach with plans to reduce carbon emissions and preserve the climate. The latest US move prompted Russian President Vladimir Putin to say: “The US cannot address climate change by just reducing investments and oil production. That must be done gradually while searching for alternatives.”
Putin hits home with barbs
Indeed, the Russian President was right. The development of renewable energy sources requires time, sophisticated technology and huge investments that are simply not available for many countries. As for the lack of gas supplies to Europe, the Russian President blamed the European Commission for the shortage and the rise in prices, saying that the Commission made a mistake when it reduced long-term contracts and switched to gas trading on the stock exchange.
In fact, Russia is trying to take advantage of the supply crisis to obtain administrative approvals to operate the Nord Stream gas pipeline, which links it to Germany and something Washington opposes. The other factor that has contributed to the shortage of supplies and rise in oil and gas prices lies in the significant decline in new investments. There is a near halt in the production of the shale gas and oil.
The latest OPEC report suggests “demand for oil will reach 104.4 million barrels a day by 2026, compared to 99 million barrels currently, and will rise by about 17.6 million barrels until 2045”. Demand will continue to rise, while supply will rise at lower levels, which may lead to the price of a barrel touching $90 amidst intense speculation.
Some in the commodity markets have been betting on future contracts at even $200 a barrel! While we can rule out those price levels, the popular bet is for $90-$100 a barrel, and something which quite achievable.
-- The writer is a specialist in energy and Gulf economic affairs.