An Explosive Situation
It feels as if each day a new story emerges about the oil market. Over the past few months, prices have been especially volatile, continuously dropping and surgring. The question is, why? Why is there so much uncertainty around an ageless staple? What will the future of oil prices entail?
There are two main types of oil involved in today’s production: crude oil, otherwise known as petroleum, and natural gas. Crude oil is a liquid that consists of hydrocarbons and other earthly compounds and is extracted through oil drilling. The main use of crude oil is fuel, often used for vehicles or airplanes. Natural gas, on the other hand, is a purer form of oil. Burning natural oil produces 30 percent less carbon dioxide than crude oil. Natural oil is mainly used at home for cooking, heating and cooling. While they fulfill different roles, both play an essential role in daily life.
The oil market is largely dictated by the actions of OPEC, or the Organization of the Petroleum Exporting Countries. They account for 39.5 million barrels daily, or 40 percent, of the world’s crude oil, according to statista. Saudi Arabia, Iran and Qatar are amongst OPEC’s most prominent members.
On Nov. 20, 2018, the United States announced that it would enforce strict trade sanctions on Iran, which included the $25.7 billion of annual crude petroleum exported annually. Many government officials worldwide were concerned that this sanction would create a global oil deficiency, causing an imbalance in the supply and demand within the oil market. The effects were felt immediately; in October, the price for a barrel reached $85, a 4-year high. Many were concerned that prices would continue to rise to prevent further inflation.
The United States, led by President Trump, decided to take initiative when it announced in August that it would increase crude oil production from 1.31 million barrels per day (bpd) to 10.68 million bpd to combat oil deficiencies. This caused a chain reaction, triggering both Russia and Saudi Arabia to increase its oil production to 10.7 million bpd, which sparked an increased in production in Angola, Nigeria and the United Arab Emirates.
But instead of fixing the problem, they worsened it. Once again, there was an imbalance in the supply and demand for oil, but this time there was too much oil and not enough demand. The price of oil plunged to $59.30 on Nov. 23, which was a 22 percent cut in the month of November alone, according to seekingalpha. Many countries believed that modifying their oil production was the only solution to regulate oil prices.
But not every country agreed with this course of action. Ahead of the upcoming OPEC meeting on Thursday, Dec. 6 in Vienna, President Trump pressured OPEC members to maintain production at the current rate, stating on Twitter, “Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!”
Meanwhile, there was much disagreement within OPEC. While almost all countries believed that a cut was necessary, there was much debate as to how to best implement it. Saudi Arabia believed that it was only fair to mandate that all member-countries cut production equally. Other members, such as Iran and Kuwait, argued that the larger producers should bear most of the burden. Additionally, many countries within OPEC were upset about the “favoritism” Saudi Arabia was giving non-member Russia, believing that the two oil heavy-weights were meeting in private and discussing a side agreement. Fed up with Saudi Arabia’s leadership, Qatar decided it would leave OPEC in the near future. Although it ranks 11 out of 15 in crude oil production, it is the highest producer of natural gas globally, exporting 77.2 million metric tons in 2016, according to motelyfool.
After the meeting on Thursday, Dec. 6, Saudi Arabia agreed to slash oil production by half a million barrels a day, backtracking on an earlier announcement that stated it would not do so. Russia, although not part of the cartel yet still a major player, also decided to cut down oil production by 230,000 barrels a day. While many other OPEC members agreed to follow suit, some refused to cooperate. Iran, Venezuela and Libya were all exempt from the production cuts because of either sanctions or economic turmoil.
While individuals like Donald Trump are of the opinion that the U.S. should maximize its oil production, not everyone agrees. Some argue that oil prices must be regulated and that production must be carefully adjusted to ensure that oil prices remain at a steadier, more expensive price. For example, after the stock price of W&T Offshore, Inc. considered one of the international benchmark of oil prices, increased in September, there was much optimism. But as October began, the stock price began to decline. November was marked by more of the same, as prices plummeted to $5.81 at the month’s end. An increased or retained oil production would impact the value of oil, further worsening profits.
In conclusion, there is still much uncertainty about the ever-evolving oil market. Although OPEC seemingly agreed to cut oil production, it came at a cost of Qatar deciding that it no longer wanted to be regulated. Within the United States, there is still much disagreement, as the President’s agenda clashes with that of many national oil producers.