A market without OPEC isn't good for the US

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It’s no surprise to see US politicians in an open confrontation with the Organization of Petroleum Exporting Countries (OPEC).

Since 2000, the US Congress has discussed various forms of a legislation called “No Oil Producing and Exporting Cartels Act,” or NOPEC. If this becomes a law then it could open OPEC up to antitrust lawsuits by the US government on charges of manipulation of world’s energy prices.

The House of Representatives introduced a version of the bill in May. The Senate earlier last week also brought up a draft of the legislation, which would amend the Sherman Antitrust Act of 1890 that was used more than a century ago to break up the oil empire of John Rockefeller.

There is always political pressure on OPEC whenever there is an election in the US and gasoline pump prices are making voters unhappy.

So what’s new this time? The last two US presidents George W. Bush and Barack Obama threatened to use their veto power to prevent NOPEC becoming law. This time there is a President, Donald Trump, who is very unhappy with OPEC as he accuses the producer-group of being a cartel that keeps oil prices high.

There are many misconceptions about OPEC in US political circles and these misconceptions are here to stay as long as the US is unable to increase its own production significantly.

First, OPEC has no price targets. They favor certain prices just like any consuming nation of oil but prices these days are determined by the market and traders in London and?New York. This is an established fact that everyone knows.

Second, OPEC only pumps one third of?the world’s oil supply today and that is not enough for the group to control the market or prices. Actually, since 2014, oil prices are more responsive to developments in US local market than to what happens in OPEC. A good example of that is the premium of geopolitical risks.

In 2011 and 2012, oil prices rose sharply by tens of dollars after 1 million barrels a day of Libyan supply went off the market. Today, Libyan output can go down sharply like just what happened this month after some ports closures and oil prices only added few dollars.

What has differed? The market is awash with crude from outside of OPEC and traders think that can replace any supply from anywhere else.

Third, in most cases, marginal producers of oil are the ones who push prices on the margin and not big producers especially when the latter are pumping at their maximum. Most of the marginal producers now days are in shale oil plays in the US and in some other areas of the world like in Russia, Brazil and Canada.

Fourth, there was a time when Saudi Arabia and OPEC were the swing producers of the world, but now days shale oil producers share some of that role to some extent, although not fully as they are not coordinated and they don’t act unilaterally.

Therefore, even if OPEC wanted to become?an influential cartel today, it can’t. But the US government wants OPEC to be a cartel and president Trump keeps asking OPEC to lower oil prices and this is a very contradictory approach.

What’s more confusing is that the US pressure isn’t helping OPEC and Saudi Arabia to plan for long or medium terms. The US government and politicians focus is narrowed on the short-term price movements. OPEC can’t think like that.

For instance, there is some uncertainty over demand in the second half of this year due to various reasons among them the concerns over the impact of US trade war with China over economic growth of the country, and China is biggest importer of crude oil today. Also, with current oil prices, there are fears that demand maybe dampened in coming months.

In such circumstances OPEC must plan for the next six months and must calculate output based on supply-demand factors to keep the market well-balanced. If OPEC to follow the American model, it must pump more crude every month to keep gasoline prices lower.

That may result in mismatch between supply and demand and if oil prices collapsed, the US shale oil industry is the first to suffer before anyone else as they are among the high-cost producers in the world and not OPEC.

Saudi Arabia has a sound policy of producing crude based on customers lifting. The country doesn’t dump crude into the market and don’t store crude on barges without a clue what to do with it. In some months, some production goes to storage but these don’t make up a big chunk of its daily output. In fact, Saudi crude stockpiles has been declining since last year. It went down from 258.8 million barrels in May 2017 to 235.4 million barrels in May 2018, according to data by Joint Organizations Data Initiative.

And yet American policy will impact the market further. A shortage is expected sometime at the end of this year due to the US sanctions on Iranian oil exports. So it’s premature for OPEC to pump an additional 2 million barrels a day that Trump wants as gasoline prices aren’t the indicator that OPEC uses.

What US politicians should focus on is the state of the investments in the oil market and the right oil price for promoting them. And they should stop political moves against OPEC that will result in a mismanaged oil market.

OPEC can’t do the job alone today and certainly not Saudi Arabia. And the US needs ?to coordinate its energy policy constructively with OPEC in the same way Trump wants to coordinate it now with Russia as both countries announced last week.

OPEC has its vices, but whether US politicians love it or not, it will stay the safety valve and lender of last resort in the industry. And a reformed OPEC is better than no OPEC.

• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?”

Twitter @waelmahdi

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