In today’s Finshots, we explore the role of some of the biggest oil-producing countries in the world and how the US might have an idea to break the monopoly

The Story

It’s been a while since we’ve written about the world of oil. So let’s get one thing out of the way first. The oil market is in the hands of a tiny group of countries.

We have OPEC or the Organization of Petroleum Exporting Countries. It’s a group of big oil producers primarily from the Middle East who banded together in 1960. Their goal was to dictate the terms of the oil trade. And what started with just 5 countries is now 13 members strong.

But there’s also OPEC+ which came about in 2016. This includes 10 additional members such as Russia. And together, these 23 countries produce 40% of the world’s oil.

Now you’d imagine that when a group has such a significant market share any actions they take can sway the oil market massively right?

That’s precisely why when these folks get together behind closed doors, the rest of the world sits on the edge of their seats. The amount of oil they decide to supply dictates prices across the globe.

And a couple of days ago, when OPEC+ got together in a fairly informal meeting, they made a decision that shocked the world — they decided to cut oil supply by over 1 million barrels a day.

Now the world consumes 100 million barrels of oil a day. So having 1% of the global oil tap turned off isn’t a big dampener. But then, if it isn’t such a big deal, why did crude oil prices jump by 8% after this surprise announcement, you ask?

Well, look around at the environment we’re living in now. The world is already battling high inflation. And a drop in supply means that the prices of crude oil could rise. We’ll end up shelling more money at the fuel stations. And when crops, fruits, vegetables, or any product is transported across the world, the higher fuel costs will play spoilsport too. All of that will get passed on to us. And we’ll feel the pinch of higher prices.

Globally, central banks that are trying hard to extinguish inflation by raising interest rates could be forced to nudge rates higher. It’ll exacerbate the economic slowdown.

Now if you think about it, that doesn’t sound like a good deal for OPEC+, right?

If they push the world into a recession, then people will need less oil. And if they need less oil, OPEC+ doesn’t make too much money.

So why on earth would they cut supply now?

Well, maybe OPEC’s simply trying to stay one step ahead. They’ve seen that the prices have fallen by over 40% in the past year. They know that an economic slowdown is inevitable. So they’re trying to push prices up and snag profits while demand is still holding steady. To tweak a popular phrase, they’re trying to “make hay before the sun sets”.

And something else has changed. See, a few years ago, OPEC+ used to think twice about cutting supply and pushing prices north. They were constantly worried about losing market share. Because each time the prices of crude would rise above a certain level, US shale oil producers would jump in to fill the gap.

Remember the shale boom?

In the mid-2010s, the US found that it could extract a type of crude oil from certain rocks. And everyone rushed to get rich in the shale business. For a while, it hurt the fortunes of Middle Eastern oil producers. In fact, OPEC decided to create OPEC+ in 2016 because it wanted more countries on its side to battle the shale producers.

But then, the shale boom turned into a bust. Turns out companies had got too excited and borrowed and spent a lot of money. They didn’t make enough returns on these investments. Many companies went bankrupt. And the existing ones tightened their belts and cut back on their mega-expansionary dreams.

So even when prices are inching upwards today, there’s no massive shale boom trying to snatch market share. And that has cleared OPEC’s lane again to tinker with their supply.

But there’s something else that no one is talking about. Something big that could challenge the might of OPEC+…

We’re talking about NOPEC.

No, it’s not another cartel. It’s called the No Oil Producing and Exporting Cartels Act and it’s something that the US is trying to introduce to counter the might of other oil-producing nations.

So, what will the ACT do?

Okay, let’s make one thing abundantly clear — OPEC+ is a cartel. And the basic definition of a cartel is “companies who join together to control prices and limit competition.” Just that in this case, it’s a bunch of countries that collude together to indirectly manipulate oil prices.

When companies collude to set prices, the regulators go after them. But these aren’t companies. They’re countries. And that lends them some sort of sovereign immunity.

So all that the non-members can do is request the cartel to play fair.

But what if they don’t?

Well, that’s why the US wants NOPEC. They want a law that can strip that immunity from the cartel members. And give them the opportunity to drag the cartel members to an American court to question their tactics. Maybe even try and get billions of dollars in relief for price collusion.

On the face of it, it seems quite silly no — the US taking Saudi to court in the US for tinkering with their oil supply?

But don’t forget that many of these OPEC nations have massive assets in the US. They hold US bonds. They might have invested in American startups. And they know that the US can be vindictive and freeze those investments in some way or the other.

The threat of the bill was so high that some experts think that’s why Qatar decided to quit OPEC in 2018. It didn’t want to hurt its interests.

On the other hand, it’s not easy for the US to enact such bills either. It has its own risks.

See, the US dollar is still the most powerful currency in the world. A lot of international trade is settled in the dollar. And that gives America leverage. But in 2019, Saudi Arabia actually told the US that it would ditch the dollar for other currencies for its oil sales. And that’s not something the US would want.

But with surprise oil cuts like this threatening to spike inflation, it’ll be quite interesting to see how this battle for clout in the oil trade plays out now.

Until then…

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