The Fuse

As Saudi-Russia Connection Tightens, Importance of Maintaining Fuel Economy Standards Grows

by Matt Piotrowski | April 03, 2018

Given the possibility of higher prices and a fundamentally different oil market in the 2020s, it is important that the United States implements essential and pragmatic supply- and demand-oriented policy solutions, such as fuel economy regulations, to reduce consumer vulnerability to global price spikes and mitigate the influence of Saudi Arabia, Russia, and other producers.

Modernized fuel-efficiency standards have been a cornerstone of energy policy since the 1970s, reducing the negative effects of petrostates on the U.S. economy.

Modernized fuel-efficiency standards have been a cornerstone of U.S. energy policy since the 1970s, reducing the negative effects of petrostates on our economy. The Environmental Protection Agency (EPA) officially announced Monday that it has completed the Midterm Evaluation for fuel economy standards for cars and light trucks for model years 2022-2025, concluding the current standards should be revised. The EPA has not yet determined the status of California’s waiver and Administrator Scott Pruitt said: “It is in America’s best interest to have a national standard, and we look forward to partnering with all states, including California, as we work to finalize that standard.”

Looser standards could reverse the gains that stricter fuel economy goals have created over the past decade in limiting oil demand growth and reducing imports from petrostates, particularly those in OPEC. Americans are now driving more than ever, but gasoline demand growth has been, for the most part, held in check. This slowdown in gasoline growth is in large part due to stricter fuel economy standards put in place during the Energy Independence and Security Act of 2007, and the updated 2012 agreement. A mix of economic growth and population increases, among other factors, will likely lead to even higher vehicle miles traveled in the coming years and decades.

A mix of economic growth and population increases, among other factors, will likely lead to even higher vehicle miles traveled in the coming years and decades.

As SAFE’s CEO and President Robbie Diamond said: “A workable solution remains possible and critically important. The federal government, the auto industry, and California must continue to work together in good faith to enhance America’s long-term energy security in a geopolitically unstable world.” He added: “If the parties can seize the opportunity to optimize this process, and avoid diverging standards between California and the federal government, the outcome will be a win-win for consumers, the auto industry, and our national security.”

The tighter link between Saudis & Russia

The alliance between OPEC and Russia, along with other non-OPEC producers, has fundamentally changed the oil market over the past 15 months, reinforcing the need for active solutions on the demand side to improve U.S. national and economic security. Prices have reached levels not seen in since 2014, and continued cooperation among major producers should keep the market elevated, leading to higher costs for consumers at the pump. Brent crude prices gained almost nine percent in March and are up about five percent year-to-date. U.S. gasoline prices have risen by 15 percent in the past year.

The OPEC-Russia bloc, which agreed in late 2016 to reduce supply to increase prices, may endure longer than first anticipated. According to the Saudi crown prince, the cartel and Russia are looking to cement a relationship that will last for 10-20 years. “We are working to shift from a year-to-year agreement to a 10 to 20 year agreement,” Saudi Crown Prince Mohammed bin Salman told Reuters last week.

The United States imports 8 million barrels per day of crude, with a third of that coming from OPEC countries, despite the rapid rise in domestic production.

Such an agreement would bind Russia, Saudi Arabia, and the rest of the producers in The Vienna Group—which now control 55 percent of global oil supply—to active “management” of global oil markets for the foreseeable future. While concrete details of any agreement have yet to emerge, it is clear that the Saudi-Russia link is not simply a short-term phenomenon.

When United States’ shale output reaches its peak and eventual decline, petrostates will have the potential to gain even more market influence. Today the United States imports 8 million barrels per day of crude, with a third of that coming from OPEC countries, despite the rapid rise in domestic production. That import number may rise again unless comprehensive policy measures are taken.

The largest myths that have gathered support over the past few years is that OPEC has lost its market power and oil prices will remain relatively low due to shale. But as prices rise and OPEC regroups, it will likely gain even more influence over price and fundamentals in the coming years, making it a priority for the United States to reduce oil consumption through measures such as modernized fuel economy standards.

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