The crude oil world has inched into a crisis mode.
The world faces a “much bigger” energy crisis than the one in the 1970s. Fatih Birol, the executive director of the International Energy Agency (IEA), told the German daily Der Spiegel in an interview last Tuesday.
The IEA, the Organization for Economic Co-operation and Development (OECD) energy watchdog, was formed in the immediate aftermath of the 1973 Arab oil embargo.
“Back then, it was just about oil,” Birol told the news outlet. “Now we have an oil crisis, a gas crisis and an electricity crisis simultaneously.”
In 1973, politics turned the crude oil world upside down. Major Arab producers opted to ban oil supplies to major Western nations, owing to their support for Israel during and after the 1973 Arab-Israel war. The crude markets went berserk, and major oil-producing nations gained control, for the first time, of market fundamentals. Prices went up and scarce supplies resulted in long queues at gas stations across most of the globe.
Sheer politics caused that crude upheaval, and since then, there has been a major geopolitical push to separate oil from politics. Oil is a commodity, not a tool to advance political objectives – that’s the mantra delivered to Arab and OPEC oil producers.
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But despite all the rhetoric, the crude oil world is back in crisis mode – courtesy of politics. And in sharp contrast to the ’70s, today, it’s consuming nations and not producers using oil as a tool to advance their political objectives.
Citibank’s global head of commodity research, Ed Morse, emphasizes that oil is overvalued at around US$120 a barrel and should be near US$70. Brent crude oil should fall significantly as demand drops and recession fears loom, argued Morse in an interview with Bloomberg on Tuesday.
And we can blame political meddling.
The world would have been in a comfort zone had oil stayed in the US$70 range. That range would also have meant lower oil revenues to Russia – meeting the prime objective of the coalition trying to punish Russia for invading Ukraine.
But to punish Russia, the European Union agreed last week to slash its oil imports from there. After considerable haggling, EU leaders agreed to cut Russian oil imports by about 90 per cent over the next six months. Currently, the 27-country bloc relies on Russia for 25 per cent of its oil requirements. This could stretch the supply side of the global energy balance further.
However, the EU didn’t opt for a complete ban on importing natural gas from Russia any time soon. The bloc imports 40 per cent of its gas – for everything from generating electricity to heating homes – from Russia. Finding alternative natural gas supplies is tougher than for oil.
“Russian oil is much easier to compensate … gas is completely different, which is why a gas embargo will not be an issue in the next sanctions package,” Austrian Chancellor Karl Nehammer said.
To compensate for the loss of Russian crude oil on the European markets and to stabilize the global demand-supply balance, considerable pressure was exerted upon the Organization of Petroleum Exporting Countries (OPEC) to rapidly increase their output.
After tough political bargaining with U.S. President Joe Biden and his allies, and after winning major political concessions, Saudi-led OPEC finally announced on Thursday that it would hike output in July and August by a larger-than-scheduled volume. The OPEC+ ministerial group agreed to enhance total output by 648,000 barrels per day (bpd) in July and August, from the original schedule of 420,000 bpd.
Nevertheless, some observers question the ability of OPEC members to reach the new output level. Over the last few months, several OPEC members have been unable to meet their output quota commitments for one reason or the other.
There has been considerable pressure on OPEC to separate politics from oil. The ongoing efforts to strangle the flow of petrodollars to Russia, however, is pure politics in the face of a fragile global energy balance.
The common man is paying a steep price for these ongoing political games.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.
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