Strategic move of Russia?

olieprijzen redactiecommissie 16-3-2020

Some may have missed it, but there is currently a lot to do around the global oil production. Consumers see this mostly because of low prices at petrol station. The price of crude oil went down by 30% at the beginning of March and the stock markets are having bad times. As is often the case with changing oil prices, OPEC was involved in the plunge in the oil price. Although this is probably not in favour of them.

The OPEC (Organization of Petroleum Exporting Countries) has been trying to keep the price of oil high for years by supplying relatively ‘small’ amounts of oil. This has been achieved by making agreements not only between the OPEC countries (mainly Middle Eastern countries themselves, but also with other oil-exporting countries such as Russia and Kazakhstan. The idea behind this collaboration is to create a more stable and higher oil price than if she let the market do it’s thing. This has to do with the fact that there is more competition and more supply, which means a lower price. According to many, OPEC is therefore a cartel within the oil industry, but OPEC itself denies this. As you may know, cartel formation is prohibited in the Netherlands to prevent unfair competition. It is difficult to act internationally against the OPEC cartel formation, because it is a cartel of sovereign states and not of commercial companies. Moreover, the cartel has enormous power within the oil industry and the EU does not see OPEC as a cartel.

The agreements between the OPEC and its allies run until March 2020. However, Russia has already indicated that it does not want to extend these agreements. Experts expect Russia to do this to drive US shale oil companies out of the market. A reason for this is that the Russians have largely had to build the gas pipeline between Russia and the EU themselves and because the US is boycotting Russia’s state oil concern. The emergence of US shale oil has also reduced the market share of the OPEC and Russia. Because Russia and the OPEC countries can produce cheaper than American oil companies, it remains unclear whether these American oil companies will be able to continue. Since the growth of American shale oil companies, the United States has become a net exporter of oil. Therefore, the US used to benefit from a price decrease, but nowadays from a price increase.

But other oil producing countries are also affected by the price cut. For example, Saudi-Arabia’s reserves have been declining for years, while the population is only growing. The country is also trying to become less dependent on oil extraction. However, this costs a lot of money. Part of this money must come from the sale of shares of Saudi Aramco (state oil company of Saudi Arabia). This company too is now being hit hard. Although Russia will also have a harder time in the short run, they should be able to deal with the low oil price. This is partly because Russia has large oil fields, a favourable currency exchange rate and huge reserves.

Although it is beneficial for the consumers of oil in the short run, it is expected that there will be a lot more fluctuations in the price of oil and the uncertainty in the oil market will increase.

By: Wouter Pen