With the unceasing rise in oil prices, demand is growing to hike production and counter the price gains. This suggests the current situation has something to do with supply and demand of oil - but the facts are something different.
Ignoring the real issues will not help address the root causes that led to oil at $100 a barrel plus. So, what could be the real factors jacking up oil? Do the reasons have something to do with output issues and market fundamentals alone? Or are they linked to geopolitical factors outside the control of oil producing countries, i.e., the OPEC+ members?
If we know the actual factors, they will explain the way out to limit oil’s gains, which have cut deep into the global economy and set off high inflation rates. On the output, market data and those from energy-related organizations, including the International Energy Agency and OPEC, indicate there is a balance between supply and demand levels, and that the producing countries are completely meeting the needs of the markets. In simpler terms, there is no shortage of oil supplies.
It's all to do with geopolitics
This takes us to the second possible reason - geopolitics. Recent weeks have witnessed many incidents that directly hit prices and caused the wild fluctuations. Even before the Russia-Ukraine crisis, oil was between $75-$90, but once the conflict started, it went up to $130 plus. And a few days later fell to $96 after news of a successful outcome to the Russia-Ukraine negotiations. Later, it became clear that these were nothing but an exaggeration, which led to prices up shooting its way to $115 at the beginning of this week.
Has there been any change in the levels of supply and demand in the last few weeks in which these fluctuations occurred? No. Supply and demand levels have been moving in parallel within the range of 99 million barrels a day.
This means the price hike is mainly from geopolitics and not by supply and demand imbalance. What is the point then of the West demanding to increase to oil production. If this were the case, there will be consequences for the economies of the producing countries as soon as geopolitical tensions are resolved.
Detrimental to oil producers
In addition, increasing production without an agreement within OPEC+, which is what Western countries want, will ruin the production ceiling agreement and create a surplus in the markets. If the increase coincides with reaching understandings to end the Ukraine crisis, oil prices will collapse due to the imbalance to supply and demand levels. In fact, this is something oil producing countries must try to avoid, especially those that have a surplus in production capacity.
The root cause of the crisis has to be addressed directly, and what is required is the easing of geopolitical tensions taking into account the interests of all parties in the conflict. Only then will we see oil returning to acceptable levels, and without the need to increase production for the economies of the producing nations. If the conflict continues, attempts to raise production will not work out. Prices will continue to rise with some fluctuations caused by speculation and profit taking.
In fact, prices may witness unprecedented gains, given that the major consuming countries have used up some of their strategic stocks to reduce prices but without any tangible result. They will need to refill their stocks soon to maintain their energy security, which would lead to a further rise in demand. This would strain the ability of the producing countries, which means the only real solution is to resolve the Ukraine situation. Anything else would lead the global economy into a whirlpool of unknowns.