Why it is Difficult for Russia and Saudi Arabia to Increase Oil Prices

A very nice article from Forbes, that explains why it is currently very difficult for the international oil cartel to increase oil prices. The price of oil has collapsed below 30 dollars per barrel in 2016. The following tables from Statista depict average oil prices from 1960 to February 2016.

Average Oil Price 1960 – February 2016 Statista

http://www.statista.com/statistics/262858/change-in-opec-crude-oil-prices-since-1960/

Forbes refers to the agreement between Russian and Saudi Arabia. The two countries agreed to freeze their oil productions in order to boost prices. Russia and Saudi Arabia are the two largest exporters of oil. Qatar, and Venezuela have already accepted the deal. The United Arab Emirates, Kuwait and Oman have also said they will respect any deal reached by the major players. However the article says that for a number of reasons it is difficult for the agreement between Russia and Saudi Arabia to be effective i.e. increase oil prices.

First of all, at the moment the Russia and Saudi Arabia produce huge quantities, and freezing their production means they will keep producing huge quantities, since the agreement does not involve reductions in oil productions.

Moreover, according to Forbes there is a credibility issue, and each party worries that the other parties will not respect the agreement in practice, and it also gives Russia as an example. In 2001 and 2008 Russia agreed to reduce her production but did not actually do so. According to Forbes Qatar is willing to monitor the deal in practise.

An even greater problem is that Iran refuses to freeze its production, because by December 2015 Iran was only producing 2.7 million barrels of oil per day, while Saudi Arabia is producing approximately 10 million barrels per day. Now that economic sanctions against Iran have been lifted, Iran wants to bring its production to a level of 5.7 million barrels per day by 2018.

Iraq is the other problem. Iraq is currently producing 4.35 barrels of oil per day, and it is planning to increase its production to 6 million barrels per day by 2020.

Finally there is the problem of the American energy companies that produce oil from shale rock. These are private companies and are not part of the international oil cartel. They will keep producing oil as long as they find a buyer for their oil, and as long as the price per barrel exceeds its cost of production. To fight the American companies the international oil cartel is hoping that Bernie Sanders will rise to power in United States, in order to heavily tax the American energy companies. By doing so Sanders will increase the price of oil in the United States, which in turn will make the oil of the international oil cartel more competitive, and they will manage to gain a part of the share currently held by the American companies. See “American Politics in the Age of Oil : The Bernie Sanders Phenomenon”.

https://iakal.wordpress.com/2016/02/21/american-politics-in-the-age-of-oil-the-bernie-sanders-phenomenon/

I must also say that after the American companies invented new production techniques which allowed the production of oil and gas from shale rock, the United States became the largest oil and gas producer in the world and they are a big problem for the international oil cartel, which is placing its hopes to people like Bernie Sanders and his likes.. It is true of course that due the huge volume of the American economy, the United States remain the largest importer of oil. See Bloomberg “U.S. Ousts Russia as Top World Oil, Gas Producer in BP Data”, June 2015

http://www.bloomberg.com/news/articles/2015-06-10/u-s-ousts-russia-as-world-s-top-oil-gas-producer-in-bp-report

Articles

“Despite Stillborn Deal, Saudi-Russian Petrodiplomacy Could Reshape The Future Of Oil”, February 2016

http://www.forbes.com/sites/christopherhelman/2016/02/18/despite-stillborn-deal-saudi-russian-petrodiplomacy-could-reshape-the-future-of-oil/?utm_source=followingweekly&utm_medium=email&utm_campaign=20160222#274b81c749ae

“Average annual OPEC crude oil price from 1960 to 2016 (in U.S. dollars per barrel)”, February 2016

http://www.statista.com/statistics/262858/change-in-opec-crude-oil-prices-since-1960/