OPEC+ will meet in the coming days to decide on next steps in regards to unwinding the extraordinary production cuts put into place at the start of the pandemic.
With crude prices trading at seven-year highs, a growing number of major oil-consuming countries have been pressing the oil cartel to add more supply on to the market to defray rising costs and concerns about inflation. The diplomatic pressure comes at the same time that countries are attempting to negotiate more ambitious international climate action, highlighting the upheaval in global energy markets.
OPEC+ sees uncertainty
The production limits for the OPEC+ coalition have been increasing at a rate of 400,000 barrels per day per month since July. On November 4, the group meets again, where they will likely agree to stick with that current trajectory.
But with Brent trading in the mid-$80s per barrel, oil consumers are feeling the pinch. The Biden administration has called on OPEC+ to speed up the increases, and more recently, Japan and India have as well.
“I do think that the idea that Russia and Saudi Arabia and other major producers are not going to pump more oil so people can have gasoline to get to and from work, for example, is not, is not, right,” Biden said Sunday at a news conference in Rome.
However, judging by the statements from several OPEC+ producers, they appear unlikely to change course. Kuwait, Iraq, Algeria, Angola, and Nigeria recently issued statements in favor of sticking with their current plan. OPEC+ is enjoying both rising oil prices and rising market share for their oil, so there appears to be little desire to attempt to fix what isn’t broken.
OPEC+ is enjoying both rising oil prices and rising market share for their oil, so there appears to be little desire to attempt to fix what isn’t broken.
Some oil analysts see the market continuing to tighten. “A combination of rapidly growing gasoline demand and the ongoing recovery in middle distillates could squeeze oil prices higher through 2022,” Bank of America wrote in a note to clients. “And given the rigidities that we see on both the supply and the demand sides, with every 1mn b/d supply or demand imbalance leading to a $24/bbl move in oil prices, we believe crude oil prices could hit $120/bbl by the middle of 2022.”
But the bank added a rather significant caveat in the very next sentence: “Of course, a run-up above $100/bbl will most likely require OPEC+’s acquiescence,” the analysts wrote. “After all, movements in crude oil prices since the pandemic began, and well before then for that matter, have been closely associated to OPEC+ decisions.”
There is no shortage of headline-grabbing numbers like the $120-per-barrel call that Bank of America issued, but the same analysts acknowledge that OPEC+ would essentially need to sign off on letting the market tighten to $120 and that there would be no response from consumer countries. These are big assumptions that make $120 seem like an unlikely scenario.
In fact, the upcoming OPEC+ meeting, at which the group is expected to stick with its 0.4-million-barrel-per-day increase, could result in the U.S. government moving to release oil from the strategic petroleum reserve to tamp down prices, according to Standard Chartered. Gasoline prices are already uncomfortably high, and if OPEC+ is perceived to be non-responsive to such concerns, the Biden administration would probably take action.
Others could act as well. “Comments by other governments, and most particularly Japan, over the past week suggest that there is a groundswell of support for a broader International Energy Agency (IEA) coordinated release,” Standard Chartered said.
Nevertheless, few expect oil prices to fall substantially in the short run, and oil-dependent economies will feel the pain.
Few expect oil prices to fall substantially in the short run, and oil-dependent economies will feel the pain.
Meanwhile, in Glasgow, global leaders are trying to ratchet up the climate ambition. There is talk of limiting fossil fuel financing, especially for coal; slashing methane emissions; financing for developing countries; vehicle electrification; and halting deforestation – among many other priorities that the UK government has succinctly summed up as “coal, cars, cash and trees.”
High energy prices have cast a shadow over the talks. The oil and gas industry has tried to bill the price spike as a symptom of climate policy and energy transition, while many leaders are calling for more aggressive action to speed up the transition and get off of volatile fossil fuels.
“[T]he COP26 meeting is providing a forum in which, while the focus on longer-term carbon balances, several governments have argued that current prices are a reason to accelerate the transition from oil,” Standard Chartered wrote in a note.
The sight of western leaders pleading for more oil while also trying to stitch together coalitions to act on climate is illustrative of the predicament the world currently faces. Economic pressures from rising energy prices come at a time when the climate crisis continues to worsen.
Economic pressures from rising energy prices come at a time when the climate crisis continues to worsen.
A few years ago, experts saw something of a “decade of disorder” from inadequate investment in fossil fuel supply. That shortfall has indeed occurred, and there is little sign that fossil fuel investment will return even close to levels seen a few years ago. Nor should it. The world is already staring down a decade of disorder (and longer) of a different sort – from increasing climate disasters.
The task at hand is ensure a smooth transition, an admittedly monumental challenge. But slowing down climate policy will not lead to less suffering. The cost of inaction on climate is enormous.
High energy prices aren’t necessarily favorable to oil producers either. Whether COP26 is deemed a success or not, market trends are clear, and clean energy will supplant fossil fuels. The only question that remains is how fast the transition will occur. While oil and gas proponents seek to stall climate policy, the longer energy prices stay high, the odds are that the energy transition only speeds up.