OPEC and its oil-producing partners have rebuffed President Joe Biden’s calls for increased production amidst rising fuel prices, retorting that if the United States believes the world’s economy needs more energy, then it has the capability to increase production itself.
The OPEC+ alliance, made up of OPEC members led by Saudi Arabia and non-member top producers guided by Russia, approved an increase in production of 400,000 barrels per day for the month of December.
“The coming winter will be a test in terms of energy prices, industrial production more broadly”
Several OPEC ministers have expressed concern over loosening the taps, wary of renewed setbacks in the battle against the pandemic and the slow speed of economic recovery. Countries claim that because demand is not yet high enough to justify increased production, there is a risk of market distortion. Luckily for consumers, OPEC members also have a rich history of cheating.
OPEC+ supply restraint has supported a rally that pushed global benchmark Brent crude to a three-year high of $86.70 last month.
To Produce or Not to Produce, That Is the Question?
President Biden’s overtures to OPEC + sound disingenuous against the backdrop of a Democratic Party energy doctrine, announced in January 2021, that seeks to limit production of hydrocarbons in the US and limit GHG emissions globally.
This year the Biden administration announced a moratorium on drilling permit issuances on federal lands and waters, and effectively killed the KEYSTONE XL pipeline from Canada to the U.S. in the name of environmental and Native American tribal concerns.
Biden wants to appeal to his Democratic voter base by reducing the climate costs of domestic fuel production, while also pressuring other nations to increase their output to lower domestic oil prices. In other words, politically, he wants to have his cake and eat it too.
The Biden administration’s refusal to increase oil and gas output also puts Europe in a particularly difficult situation, as the gas production in the UK, North Sea, and Holland is depleting, and there is no domestic gas supply besides Norway. Thus, the current US energy doctrine has only increased Russia’s influence in the region by making its Nord Stream 2 Gas Pipeline – which would see another 55 billion cubic meters (bcm) of natural gas supplied to the EU while circumventing Ukraine – a very attractive offer for an energy-starved Europe.
The continent’s energy woes are exacerbated by poor public policy making by the EU’s de-facto leader, Germany – which has prioritized closing nuclear plants over decommissioning coal and gas plants. Despite over $30 billion Euros invested in the German Energiewende (energy transformation) last year alone, rapid declines in the cost of wind and solar have not translated into cheap electricity due to decommissioning of coal and nuclear plants.
Electricity prices, in fact, have tended to be highest in places with the greatest share of renewable energy, Ted Nordhaus writes in Foreign Policy. In addition to the economic issues, the Covid recovery demonstrated that the renewables are simply incapable of supplying the base load of energy necessary for Europe and California to continue industrial production and keep warm at home – an important lesson for the U.S. and the world.
The coming winter will be a test in terms of energy prices, industrial production more broadly, with momentous political consequences for the upcoming elections.
As for the overall economic activity, if oil prices continue to steadily rise, this may cause an economic slowdown, as high oil prices act as a tax on growth. OPEC+ is reluctant to increase supply (and thereby lower prices) at the moment, as government ledgers in these countries were hit hard during 2020. Now they are cashing in.
But there is a risk of prices overheating. OPEC has a “goldilocks zone” for oil prices which fluctuates depending on the member. There are ‘price hawks’ who have more expensive lifting costs and therefore traditionally favor higher oil prices (Iran, Venezuela) — and price doves which can extract oil cheaply (Saudi, UAE) who want to make sure that high prices don’t drive buyers to invest in alternative energy.
Generally, the $75 to $90 a barrel range is the sweet spot which allows for sufficient government revenues, but is still not high enough to encourage investment in substitutes. But because oil prices have been historically low, members may be more inclined to keep prices higher for longer to attract the needed investment in the oil sector.
Another factor to consider is that it is not clear how much, if any, political sway Biden has over OPEC. As of 2018, OPEC member countries held 79.4% of the world’s proven oil reserves and produced about 40% of the world’s oil output.
OPEC has the ability to drive prices and the Biden administration has hampered the US’ ability to push back against the cartel’s pricing power by ramping up production. Since early 2020, pre-corona, US oil production dropped to 2018 levels.
Shale Response?
The US is the world’s top oil producer and a fast-growing oil crude exporter. In fact, multiple major oil firms, including BP Plc (BP. L), Chevron Corp CVX (CVX.N) and Exxon Mobil Corp XOM (XOM.N), have publicly announced that they plan to ramp up output or shale spending next year in a bid to rebuff OPEC’s oligopolistic supply management.
The current energy doctrine calls for a green electrification to meet current domestic climate goals. However, the issues of intermittency and electricity storage remain unresolved and are at least two decades away from workable solutions. Those aspirations, while justified in the long run, however, must co-exist with the need to give Americans and the world affordable and reliable access to energy (and stave off inflation).
Biden’s energy policy has only reduced the amount of influence we can exert on the OPEC cartel. If we continue to cede our influence and refuse to increase output when it is economically called for, we will place ourselves – and our European allies – in an untenable geo-economic position.
While the US, with its ample hydrocarbon resources, can manage in the long term – it is strategically short-sighted to allow our European allies to become reliant on cheap Russian oil and gas. Biden is walking a difficult tightrope.
Turning his back on his climate change commitments will certainly not play well with his Democratic base. At the same time, allowing oil and gas prices to skyrocket will inevitably result in Democratic losses for congressional elections in 2022 and could certainly play out in the 2024 presidential vote.
SOURCE: forbes.com