Publications: Notes at the Margin

OPEC Intends to Strand Much of the World's Remaining Oil Reserves (October 3, 2022)

 

There is only one cardinal sin in the energy business:
Never, ever, ever make yourself an unreliable supplier.
No one will ever trust you again.^[i]

 

New York Times columnist Tom Friedman wrote the words above on September 30. Friedman, a friend of this author, made the statement in an op-ed piece titled “Putin is trying to outcrazy the West.” Friedman suggested that Putin’s latest moves were similar to those of North Korea’s unpredictable Kim Jong-un. He asserted that Putin faced a real economic challenge ahead because he “was eroding the biggest source—maybe his only source—of sustainable long-term income,” adding that

 

His old customers may still buy some energy from Russia, but they will never rely so totally on Russia again. And China will squeeze him for deep discounts.

 

Now, the ministers of oil-exporting nations seem to want to “outcrazy” Putin. Yesterday morning, the major financial news outlets reported that OPEC+ was considering a production cut to bolster prices. For example, Wall Street Journal reporters Benoit Faucon and Summer Said noted that

 

OPEC+ is set to consider Wednesday its sharpest production cut since the start of the pandemic to help prop up falling oil prices, a move that could put pressure on global economic growth.[ii]

 

After explaining the exporting nations’ concern over falling prices, the authors observed that

 

Any move by OPEC+ to raise oil prices could put further pressure on Western consumers already hurting from high energy costs while also helping Russia—one of the biggest energy producers in the world—fill its state coffers as it wages war against Ukraine.

 

Other commentators noted that Saudi Arabia, the leader of OPEC+, has not taken sides regarding Russia’s invasion of Ukraine. Embedded in Friedman’s column is this message for oil producers:

 

The world is on the verge of World War III. You are either with us or against us. Should you choose to side with Russia you will see your market for oil shrink quickly.

 

Ursula von der Leyen, president of the European Union, also noted that oil producers have been tiptoed around or coddled too much in her September 14 State of the Union message:

 

Here is an important point. Half a century ago, in the 1970s, the world faced another fossil fuel crisis.... We did not get rid of our dependency on oil. And worse, fossil fuels were even massively subsidized. This was wrong, not just for the climate, but also for our public finances, and our independence. And we are still paying for this today.[iii]

 

Von der Leyen’s focus was Russia. But any actions taken by OPEC+ to raise oil prices will put the oil producers in the EU’s crosshairs. Furthermore, anything that raises oil prices will increase pressure on central banks to tighten monetary policy further in the European Union, the United Kingdom, and the United States. The tightening will exacerbate the economic problems in many countries, issues that the EU, UK, and US will not be willing to solve. The oil-exporting nations, in effect, will kill off much of the potential increase in demand in emerging markets while giving industrialized countries a further push to speed away from oil.

 

Twenty-one years ago, President George W. Bush issued this warning at a joint press conference in Paris with President Jacques Chirac: “You’re either with us or against us in the fight against terror.”[iv]

 

The same thinking is developing today in first-world nations. Oil producers outside of Russia will need to choose a side.

 

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