Publications: Notes at the Margin

The Energy Credit Crunch (September 12, 2022)

 

The oil industry has never lacked arrogance. Prominent oil company executives exuded disdain more than fifty years ago. The office of Exxon’s chief financial officer at the top of Rockefeller Center circa 1980 was far more expansive and grand than the US Secretary of the Treasury’s office in Washington. Around the same time, Exxon’s chief executive officer was audaciously telling the Secretary that Treasury was overstepping to ask how oil price deregulation might affect crude supply: “Son, it’s none of your business” captures the gist of his rebuke.

 

As blatant as their scorn was for politicians, industry watchdogs, and perhaps even the general public, oil company execs cannot hold a candle to the oil ministers from exporting countries when it comes to putting on airs of superiority. Of those individuals, Saudi Arabia’s Prince Abdulaziz bin Salman, the UAE’s Suhail al-Mazrouei, and Russia’s Alexander Novak top the list. Over the last two years, they have cut production aggressively to drive down crude and principal product inventories and raise prices.

 

Today, in a characteristic display of arrogance, the Saudi minister blames not his fellow oil ministers for the havoc they have caused but rather the markets themselves. On August 22, 2022, Bloomberg reported that “Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said ‘extreme’ volatility and lack of liquidity mean the futures market is increasingly disconnected from fundamentals and OPEC+ may be forced to cut production.’”[1]

 

On September 5, bin Salman took point with OPEC+ as they made good on the threat to reduce output:

 

“This decision is an expression of will that we will use all of the tools in our kit,” Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview on Monday, after OPEC+ agreed to cut 100,000 barrels a day in October. “The simple tweak shows that we will be attentive, preemptive and pro-active in terms of supporting the stability and the efficient functioning of the market.”[2]

 

Responding to the announcement, Richard Bronze, head of geopolitics at Energy Aspects, told New York Times reporter Stanley Reed that the cut “sets up a confrontation in terms of expectations of Western developed economies versus the Gulf States.”[3]

 

Bronze and other analysts who see this as a battle between the Gulf states and developed economies are wrong. The oil exporters have already lost from the oil price decrease caused by the March 31 strategic stock release and will lose more as the energy financial markets collapse. Little or no money will be available to fund oil purchases unless OPEC opens a commodity financing bank.



[1] Will Kennedy and Grant Smith, “Saudi Prince Says Oil’s Disconnect May Force OPEC+ Action,” Bloomberg, August 22, 2022 [https://tinyurl.com/524ae4js].

[2] Grant Smith, Salma El Wardany, and Ben Bartenstein, “Saudis Say OPEC+ Will Remain Proactive After Agreeing Supply Cut,” Bloomberg, September 5, 2022 [https://tinyurl.com/y8av6k2r].

[3] Stanley Reed, OPEC Plus Agrees to Cut Production by 100,000 Barrels a Day,” The New York Times, September 5, 2022 [https://tinyurl.com/2p95x9m3].

 

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