MW: Oil prices won’t soar in 2017, and OPEC is the reason
The Organization of the Petroleum Exporting Countries, the oil-producers’ cartel that last century haunted the industrialized powers, has harnessed Russia to help restore and multiply the organization’s pressure on the energy markets.
One month on, the move seems a success, as crude prices CLG7, -0.09% climbed from $46 to $54 per barrel, underscoring a year in which oil’s 60%-plunge since 2014 finally bottomed out at $35.
–– ADVERTISEMENT ––
Don’t hold your breath.
Yes, the decline of recent years has bottomed out. But prices aren’t about to soar because the economic conditions aren’t there. On the contrary, 2017 will expose the new-and-improved producers’ cartel as the same failed idea it has been even in its best times.
This decade’s oil glut has been fed by two trends, On the supply side, fracking has multiplied U.S. production. On the demand side, the Great Recession that followed the 2008 financial crisis slowed industrial activity in the developed world and shrank the middle classes’ available income, all of which cut energy consumption.
The common denominator between these two developments is that they represent organic economic realities. That cannot be said of what OPEC and Russia did, which is a bureaucratic plot to disrupt market dynamics.
The markets have repeatedly displayed their impatience with such administrative intrusions, which defy economic gravity by trying to obstruct the reality of supply and demand.
The world was afforded a good reminder of this axiom during Fidel Castro’s recent eulogies, when all recalled how Cuba fell on its knees once the U.S.S.R. realized the oil it was shipping Castro should be sold elsewhere for more than double that artificial price.
The OPEC-Russia deal’s vulnerabilities were evident before it was signed. A simple roll call of its parties showed that the agreement lacked four of the world’s 10 leading oil producers: China, Canada, Brazil, and the U.S.
Between them, these four produce one-third of the 10 leading producers’ output. That is besides the deal failing to recruit smaller, but still sizable, oil-producers Norway and Britain. Even more tellingly, when the deal was done, it turned out that OPEC member Indonesia had opted out.
Added up, the deal’s non-signatories represent a critical mass whose increased production as prices rise will compensate for a good portion of the quantities that OPEC and its partners have promised to remove from the markets.
This is besides that experience shows the deal’s signatories are likely to cheat each other.
As data compiled by Goldman Sachs and Commerzbank show, OPEC members have historically violated their own production caps steadily and systematically. Such a scenario is even more realistic now, because there are 11 non-OPEC parties to the deal besides Russia, from Bolivia to Brunei.
The lack of a tool for efficient supervision and disciplining punctured OPEC’s previous production caps, and there is no reason to believe that things will play out differently in the much larger and looser configuration that was unveiled last month.
The signatories will have good reason to cheat each other for the same reason they arrived at the deal in the first place, which is that most of their economies are ill.
