Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll and this is Here's Why, where we take one new story and explain it in just a few minutes with our experts here at Bloomberg.
Take a look at the price of energy this morning. Brent has slipped through sixty dollars. Fifty nine dollars is where we're treating. We are basically back to a four year low again.
When US President Donald Trump was inaugurated to his second term in January, oil prices on the international benchmark Brent crude were around eighty dollars a barrel, the highest since last summer, but in early May they dipped to around sixty dollars, the lowest in four years. One side of the story is fears over how big oil consumers like China might be hit by US trade tariffs, but there's also been a change from the countries that produce oil.
At its latest meeting, the OPEC plus group of oil producing nations decided to increase production for a second month in a row.
OPIK has been trying to balance the supply and demand and find that the continuously problem with the overproducers.
Your saudis you're like, why am I going to keep subsidizing their output at the expense of mind?
OPEC always seems to act more cohesively when there's a crisis, when they're really up against them.
The question that everybody is asking is why why did OPEK plus decide to increase the amount of barrels that they're putting back to the market by more?
So, here's why oil producers are driving prices lower. Bloomberg opinion Columnistavier Blast joins me.
Now for more.
Javier, First of all, a bit of context. How much influence does OPEC plus have over global oil prices?
OPEC plus has a lot of influence of where global oil prices because it produces, when you count all the barrels, more than fifty percent of global oil production on. So what it does can push prices up and down. And we have seen in the past that the cartel has been quite effective in cutting production, in restricting the supply to push prices much higher at times. Saudi Arabia semi official policy has been to keep prices as close as it was possible to one hundred.
Dollars a barrel.
So they are very influential, perhaps not as influential as in the nineteen seventies, the time of the two oil crisis, but it still remained probably the most important factor in the oil market.
And who holds the power within the group.
Within the group, one country and perhaps another country that really hold the power. Those are Saudi Arabia first and foremost, and then Russia. They are the number two and number three global producers. The largest oil producer nowadays is the United States thanks to the shale revolution, but Saudi Arabia and Russia pump each about ten million barrels a day. Again, when you count all the barrels, not just scrude but other liquids, and both are very influenzial.
They produce more than double.
The next member of the OPEK class Alliance, and that is a group that it was formed about a decade ago, exactly at the end of twenty sixteen. And the group is the traditional members of the OPEC cartel plus a few other countries. That's the plus on OPEK plus that decided to join forces. But they are not formal members of the oil cartel. It's what we call a club,
an alliance, or a cartel and a few friends. The friends are Russia, Katakhstan and a number of other non OPEC producers that in twenty sixteen decided that joining forces with Saudi Arabia and the rest of OPEK made sense, made economic sense, and they have been until now very effective in managing the market. But from time to time, not everyone inside this family gets along well and agrees.
With the decisions. He pointed out in your recent column. Cartels exist to drive prices higher. So why then, is opek plus increasing supply, which is a move that would drive prices down.
Yes, you are absolutely right.
I mean, the only reason for having an oil cartel is to push the price of the commodity that that cartel aims to control higher.
You do not try to lower prices.
That will be like a policy of shooting yourself in the food and that's not what ragional countries do. However, from time to time oil cartels face an economic dilemma, one of the members just refuse not to play by the rules. And the rules here are the production on quotas. The quotas are the official level that the cartel sets for each of their members how much oil they need to produce on a given month. For opek Plus, the group sets an official level for the whole group and
then quotas for each of their members. And what happened is, from time to time one of those countries say well, I want to produce more. They may have a new oil field coming on a stream, they may need the money. And at the end of the day, this is a prisoner's dilemma. The cartel can only do one thing when someone is cheating is to apply some diplomatic pressure, perhaps asking politely nicely, please would you behave to start being a bit more forceful on that diplomatic pressure and gone
publicly we are not happy. This member of the cartel is not behaving by the rules, is cheating on us. And if that doesn't work, the only other solution is to say, well, then we are all gonna do the same. We are all gonna produce about the targets. We are gonna all produce a lot more. The price of oil is gonna go down, and you're gonna pay the financial price of directions. Obviously, that is shooting yourself on the foot. To attack that cheating country, you need to share the
pain of much lower oil prices. And the Soudiasts have faced that situation in the past. They have faced oil producers have cheat on Saudi Arabia and the southdist have launched price wars against those cheating countries in the past to force them to play by the rules. They did in the eighties. Actually in eighty five is the first example. They launched effectively a price war against every other member
in OPEC. They launched a similar price war in nineteen ninety eight against Venezuela, and they lounged a price war against Russia in twenty twenty, So there is a lot of historical president.
Has it worked.
It has worked, but it is a very crude. Forgive my plan.
It is a very crude way to manage the oil market because the Southeast ultimately got their way, but only after significant pain on themselves, and at times it's not one hundred percent clear that the Southeast got what they wanted, and they were in real trouble. In nineteen ninety eight, Saudi Arabia was in massive economic pain. Ultimately they got what they wanted, but they almost bound wrapped themselves in the process.
So how much pain can Saudi Arabia take on this front? Two bring the members of the group into line here.
The problem is that the biggest cheating country is Kathakhstan, which is not a formal member of OPEK, but only part of this plus alliance, and that has a bit of at trouble because I don't think that the Saudist have nearly as much diplomatic leverage over Kazakhstan as they have had with other members, that they are much closer than part of the actual god of OPEK. And second, what we call the break even prize, so typically the price at which the budget balances excluding death each much
higher in Saudi Arabia Thanakistan. Of course, the Saudist can't take on debt, they can't reduce their petro dollar reserves. But ultimately you really aim to try to keep your budget within the price of oil and not taking too much depth. And I think that in this situation Kathakhstan can take a lot more financial pain than Saudi Arabia.
This could be quite the standoff. It is a.
Standoff, and so far what we are seeing is kataks Stan so far is getting the pressure. Clearly they are noticing it, but they are saying yeah, we hear you, which almost sounds to me the same thing that a teenager respond to their parents when their parents are asking the teenager to clean their room. Yes, mother, I hear you, and the room remains untidy for the next three months.
That's one side of the untidy room. The other factor in all of this when I'm thinking about prices is the demand side. What is just briefly the current thinking about what sort of effect the trade war and the effects on growth could have on an oil demand.
Before the trade war started, the consensus in the oil market war that global oil demand was going to growth about one percent, so that's roughly about a million borrows a day, or to put it in equal terms to an oil producer, we were going to need an Extralivia
in twenty twenty five. At the moment, everyone is reducing those forecasts, and the range goes between the most optimistic that they think that we're going to have an oil demand of our around seven hundred thousand borrows a day is thirty percent reduction in the forecast, to people that they are beginning to think, well, this is really getting very slow.
The trade war remains unresolved.
Yes, the Chinese and the Americans are talking, but they are talking about talks, so probably this is going to be worse, and they are expecting oil demand to slow down to about three hundred to five hundred thousand boroughs a day. Still everyone saw so far is talking about a slowdown in the growth. We are not talking about a contraction in oil demand, which we saw obviously during the pandemic, but that was an unprecedented situation where everyone
was not traveling. But we saw a contraction in oil demand back in two thousand and eight two thousand and nine during the global financial crisis. So if the global economy is slows down a lot, we may move from a slow down in oil demand to an actual contraction, which, together with Opek fighting internal dissidents, that could be a recipe for much lower oil prices.
Okay, heavier Plaspoomberg Opinion columnsts. Thank you very much, and you can read Hava's latest work at Bloomberg dot com Forward slash Opinion. For more explanations like this from our team of three thousand journalists and analysts around the world, go to Bloomberg dot com Forward Slash Explainers. I'm Stephen Carroll. This is here's why. I'll be back next week with more. Thanks for listening.