Brent is creeping back up towards the high-$60s per barrel, prompting a scolding of OPEC by President Trump via tweet earlier this week.
Trump’s irritability with high oil prices is well-known, but the tweet suggests that he sees oil prices getting too close to dangerous political territory once again. He wants more supply to lower prices, but OPEC is much less likely to heed his warning this time around, having been burned by him last year following the surprise waivers issued on Iran sanctions, which helped crash the market.
Trump told OPEC to “relax and take it easy,” and in response, Saudi oil minister Khalid al-Falih said: “We are taking it easy; 25 countries are taking a very slow and measured approach.”
Al-Falih’s comments suggest that OPEC will not back down in the face of pressure from the U.S. government.
The standoff is unfolding at a time when the U.S. Congress is pushing forward on the “NOPEC” legislation, which would open up OPEC members to antitrust regulation by the U.S. Justice Department. Legislation targeting OPEC has floated around Washington for years, but the momentum and odds of passage into law have never been higher. A confluence of events have come together in favor of the bill, including Democrats in the House of Representatives, an erosion of Saudi support on Capitol Hill, and a mercurial President that likes to rhetorically beat up on OPEC. Related: Oil Prices Could Soar On Trade War Truce
At a minimum, the possibility of the NOPEC bill becoming law grants President Trump significantly more leverage in his demands for OPEC to lower oil prices. So far, at least publicly, he has refrained from using that threat, most notably in his February 25 tweet calling on OPEC to “relax.”
“The effect of President Trump’s comment would likely have been greater had he explicitly mentioned the [NOPEC bill],” Standard Chartered analysts wrote in a note. The investment bank noted that the sharp fall in oil prices that day may have been a result of the market interpreting the tweet as a veiled threat to OPEC regarding the NOPEC bill. However, Standard Chartered said that may not have been the case. “Trump has not up to now been known to specialise in veiled threats; he tends to be explicit.”
So, perhaps Trump is holding his fire, at least for now. Even though Capitol Hill has warmed up to the bill, there are powerful interests lining up against the legislation, including the U.S. Chamber of Commerce, the American Petroleum Institute and much of the domestic oil industry. After all, U.S. oil producers are perfectly happy to let OPEC cut production to boost prices – OPEC’s actions to engineer higher prices works entirely in the favor of U.S. shale drillers.
Also, U.S. Secretary of Energy Rick Perry expressed some skepticism on Thursday about the NOPEC bill, arguing that without OPEC’s market management, prices could crash, dealing a blow to supply, which could subsequently raise prices again. Hailing from Texas, Perry is wary of letting his friends in the shale industry suffer. In short, no market management from OPEC means a lot more volatility.
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Still, OPEC is not exactly popular in Washington or elsewhere in the United States, so it doesn’t exactly have much of a political constituency outside of the oil industry. Bashing OPEC, or at least being seen as confronting the oil cartel, is arguably a political winner. That gives the bill decent odds of becoming law. “We see NOPEC as potentially one of the defining issues for the oil market in 2019,” Standard Chartered analysts concluded. “While President George W. Bush vetoed similar legislation on grounds of it acting against the US national interest, the possibility of it being enacted into law should it reach President Trump’s desk appears significant in our view.”
For its part, OPEC doesn’t appreciate being made the bad guy. Secretary-General Mohammad Barkindo said that if it weren’t for OPEC, the oil industry would have faced disaster. “OPEC has been doing a great service,” to the industry and to global oil markets, Barkindo told CNBC on Wednesday. “The decisions that OPEC took, together with our non-OPEC partners, literally rescued this industry from total collapse.”
When asked about the NOPEC legislation, Barkindo said: “You can ask the producers in the shale basins in the U.S. whether they have benefitted from the actions we have taken over the years.”
He essentially argued that the U.S. needs OPEC to maintain market stability. “[W]ithout OPEC, the U.S. would probably have created another organization to do exactly the same.”
By Nick Cunningham of Oilprice.com
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OPEC is not a cartel and has never been one though its history. How could it be a cartel when it was founded as a counterweight against the previous “Seven Sisters” (Exxon, Mobil, Chevron, Gulf Oil, Texaco, BP & Shell) cartel which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their own oil. OPEC has been a force for good with its efforts to stabilize the global oil market and oil prices for the benefit of the global economy.
The latest Trump tweets on OPEC and oil prices are aimed at keeping oil prices, therefore gasoline prices, low as the 2020 presidential election cycle kicks in. He doesn’t seem to realize that his objective of keeping gasoline prices in the United States low contradicts the US objective of supporting the US shale oil industry which employs 2% of the working force in the United States. He doesn’t seem to understand that reducing US dependence on foreign oil imports should take precedence over low gasoline prices which act for a short while as a tax cut.
Therefore, OPEC shouldn’t be unduly worried about the“No Oil Producing and Exporting Cartels Act,” or NOPEC Act. It has enough muscle to retaliate against the US. If NOPEC ever becomes a law and the United States tried to sue any OPEC member under the NOPEC Act, OPEC members collectively could retaliate by withdrawing every single penny they keep in the United States and stop investing in the US altogether. They could also stop all their oil exports to the US and even cut their oil production to force prices further up. This will harm the US economy most being the world’s largest consumer of oil. They could also nationalize American interests in their oil industries and discard the petrodollar and adopt the petro-yuan instead thus undermining the US financial system.
In fact, OPEC should pre-empt and sue the United States at the WTO for manipulation of oil prices to achieve unfair benefits for its economy at the expense of the economies of OPEC members.
One would expect a cartel to curb production in order to raise the price of its product as well as to share market among its members. However, OPEC has never once tried to fix a specific price nor has ever been able to achieve this goal. The fundamentals of the global oil market are the ones that have always determined the oil price helped occasionally by geopolitics. OPEC has no control on these fundamentals and therefore has no control on the movements of prices. For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel nor was it able to stop the 2014 oil price crash.
When it comes to limiting oil supply, a true cartel like the “Seven Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC has never been in such a situation. It only accounts for 42.6% of the global oil market with the rest of the oil-producing nations of the world accounting for 57.4%.
Moreover, OPEC has not been involved in any disputes related to the competition rules of the WTO.
And although President Trump might be tempted to threaten OPEC with the NOPEC Act, there are powerful interests lining up against the legislation, including the US Chamber of Commerce, the American Petroleum Institute and much of the domestic oil industry. Even US Secretary of Energy Rick Perry argued that without OPEC’s market management, prices could crash, dealing a blow to supply, which could subsequently raise prices again.
Therefore, the threat to sue OPEC or its members is a lot of hot air.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London