In December 2016, OPEC, Russia and several other non-OPEC producers struck a historic deal. For the first time in 15 years, there will be cuts in oil production. RBC’s Helima Croft said at the time that Saudi Arabia’s oil minister, Khalid al-Falih, had “something from Mario Draghi’s time, whatever it takes.” Seven years later, OPEC and Russia still control the market. But now Saudi Arabia says it can do nothing about the oil market and prices. She did her best, according to her foreign minister, Prince Faisal bin Farhad.
Perhaps seven years ago, industry observers and analysts would be surprised if someone told them that Saudi Arabia would go from being a loyal friend of the major oil-importing countries to something like an enemy.
Yet the Kingdom’s clear reluctance to reduce oil prices, which is causing the world’s largest economies to suffocate, is a logical continuation of the processes that took place during this period between “What is needed” and “We did our best”.
To begin with, the redundancies of 2016 and the birth of OPEC + were aimed at raising rather than controlling prices. Yet, frankly, it is worth noting that OPEC and its de facto leader are just as active in keeping prices afloat when excessive levels have affected demand.
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Not really now. Now the demand for oil is strong and it will probably be some time before price levels start to affect it. The reasons for this can be summarized as follows: sanctions, the US shale economy and mistakes in Middle Eastern policy.
Sanctions from the EU, the United Kingdom and the United States against Russian oil, albeit indirectly, have reduced the availability of oil from one of the world’s largest producers. A further contraction is imminent if EU officials are to be trusted. Many argue that Russia may simply redirect its oil flows from Europe to Asia, but that will not happen overnight and will not help solve Europe’s oil shortage. The market, in other words, remains tight.
Meanwhile, American shale drilling is not taking a chance to return to “Drilling, honey, drilling” because it seems to have learned its lesson, namely that decoupled production growth tends to boomerang. So now they are focusing on cash backs and paying attention to the growth of production, as inflation of production costs and shortages of materials, equipment and labor help them stay focused.
As this happens, decision-makers in Washington are desperately looking for ways to fix fences with Saudi Arabia. It is probably safe to say that no one in the White House thought the United States might still need Saudi oil when Biden’s speech was called, which he called the Kingdom a “pariah state” for the assassination of Jamal Hashoghi. . Now consumers in the United States are paying the price.
Seven years ago, relations between Saudi Arabia and the United States – and in addition with Europe – were quite cordial. Of course, some rights activists did have a problem with Saudi Arabia’s actions in Yemen, but governments were lucky enough to continue doing business with Riyadh.
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The Biden administration then took office, and they decided to tell their partners in the Middle East directly: the current host of the White House did not like the war in Yemen and would not support it. As Yemeni Hutus regularly target Saudi sites, decision-makers in Riyadh may not like it. The Saudi heir to the throne made this very clear in his first interview with Western media The Atlantic.
In the context of deteriorating bilateral relations, it may come as no surprise that Riyadh has repeatedly refused to increase oil production after first being asked and then threatened by President Biden to increase anyway. Apparently the part or the other was never there to begin with.
Europe was also not the smartest tool in the shed. After years of protecting wind, solar and hydrogen, arguing that oil is on the way out and discouraging investment in new oil and gas exploration, it’s no surprise that countries like Saudi Arabia are itching to teach it a lesson. .
In the end, they have nothing to lose. The only thing they can do is win – prices stay high, as does demand, because no one can add more supply fast enough to raise prices to more reasonable levels from the consumer’s point of view.
Back then, it all came down to bad decisions. Years later, when they were told that their main bread-making industry was dying and there was no need to save, years later, when they were cited as one of the culprits for climate change because of their oil industry, and after being called a pariah state from the leader of a nation that was supposed to be a best friend, Saudi Arabia just had to have enough.
By the way, he earns a lot of money from the current price situation.
By Irina Slav for Oilprice.com
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