Pressure is mounting from oil-consuming countries, particularly the US, on OPEC+ to increase production and bring an immediate halt to the continuous rise in oil prices, which touched $86 a barrel last week. At the G20 Summit, Japan and India joined other countries in demanding a production increase and ease the pressure on price.
However, OPEC+ members have so far resisted, particularly after they agreed early October to raise production by only 400,000 barrels per day, in line with their previous decisions on monthly increases until the end of the first quarter of 2022. Bank of America expects oil prices to hit $120 a barrel by the end of June next, while Russia’s Energy Minister Alexander Novak was quoted as saying: “Russia expects OPEC+ to raise its output by 400,000 barrels per day (bpd) at the November 4 meeting, as previously agreed.” He expects oil demand to reach pre-pandemic levels by the end of next year.
The decision by OPEC+ to stick to its plan on raising output monthly expresses the national interests of these countries to get a fair price. This rises two questions whose answers can explain why OPEC+ countries insist on steady monthly increase. The first question is related to determining the cause of the imbalance between supply and demand that leads to higher prices.
A supply-side issue
Evidence points to the responsibility of Western countries, after significantly reducing their investments in the oil industry under the pretext of climate conservation. These countries have yet to prepare for clean energy alternatives despite warnings issued by OPEC about its limited excess production capacity. Meanwhile, the populist media have outshouted the voice of reason and objectivity on the subject of climate change.
While pollution and climate change are vital issues of interest, addressing it needs time and coordination, and definitely not arbitrary ones such as halting or minimizing investment in oil. The second question is about the time when oil prices declined, after US shale oil production had reached its peak and leading to increased supply. That time, OPEC+ countries did not ask the US to cut its shale oil output to maintain fair prices. If we assumed that such a request was made to Washington, it is unlikely that the White House would have listened.
Not beholden to Biden
So, why should the oil producing countries listen to the other side, which has to understand that the past five decades of pressure have come to an end. Nowadays, everyone is seeking to defend their interests in the face of the rapidly changing global power balance.
Therefore, oil prices will continue at this relatively high level and likely to reach $90 a barrel due to the high demand caused by recovery from COVID-19 repercussions and the limited production increase mandated by OPEC +. In fact, there are no immediate solutions to a supply and demand balance through increased production, as referred to by US President Joe Biden who said, “I don’t see anything that’s going to happen in the meantime that’s going to significantly reduce gas prices and I expect them to fall in 2022”, adding that any price fall depends on other factors, including measures taken by Saudi Arabia.
Longer term solutions require increased investments in the oil sector, so as to increase production capacities. However, those who can do so suffer from populist campaigns that accuse them of the climate crisis, which makes them refrain from increasing their investments. This clearly means that there is a flagrant contradiction practiced by the consuming countries, and for which there are no answers.