He who cannot change the very fabric of his thought will never be able to change reality.
--Anwar Sadat, Former President of Egypt and Noble Peace Prize winner
Energy is back on centre stage as Republicans trump the race to the White House. To re-assert America's dominance on the oil frontier, the President has tacitly challenged OPEC's prerogative as he seeks to ramp up production. Oil has orchestrated political symphonies for a very long time and still does.
The oil embargo of 1973 made the United States privy to their energy vulnerability due to reliance on imported oil. The need to break up OPEC or neutralise its clout over oil markets was an 'option' way back in January 1974 when James Schlesinger, US Secretary of Defence, conveyed hints of 'military intervention as a last resort'. A year later, in January 1975, in a press interview, Henry Kissinger, Secretary of State under President Gerald Ford, repeated the hint at 'using force' to disrupt 'order' in the Persian Gulf. Arab leaders threatened to blow up the oil fields in such an eventuality. Fortunately, neither of the delinquencies occurred.
The UK in the 1970s was steadily losing economic power and had earned the epithet 'sick man of Europe'. In the aftermath of the 'oil shock', the advent of North Sea oil proved a game changer for Margaret Thatcher-led Conservatives as it diminished OPEC's dominance in the early '80s. It heralded Brent's ascent as the global benchmark, currently setting the price of three-quarters of the world's traded oil at the Intercontinental Exchange (ICE). The British privatisation then ushered in a nouveau hydrocarbon era, with almost fifty percent of its revenue generated by this sector and a dramatic resurgence of a weakening economy.
In 1991, in a bid to control its oilfields, Iraq invaded Kuwait. The 42-country coalition led by the US intervened as it foresaw a 'dangerous tilt of oil power 'in the Middle East, leading to the Gulf War. Drawing from history, Washington bets on oil to assert its relevance as it attempts to 'rein in the powers' that hold the key to oil taps. Trump invokes the oil industry to increase production in a fervour to push down prices and tame inflation. However, for OPEC, it is a lesson learnt from the crash of 1986. Surplus oil led to slippery economics for the leaders within the fraternity. Saudi Arabia reduced production by more than 50 percent to 'regulate' the market yet lost its share to Russia, the US and Mexico at that time. Ironically, some OPEC members cheated on their quota, and the market was awash with oil, despite the cuts, as prices eroded by 60 percent and failed to cover lost ground.
I am reminded of Mohammed Barkindo--he helped form the OPEC+ alliance and was Acting Secretary General at the 10th International Energy Forum of OPEC at Doha in April 2006--who said, "It is important that we clarify what the term' global energy security' actually means. First and foremost, security of supply and security of demand are two sides of the same coin….For all consumers and producers in this increasingly interdependent world, security resides in the stability of the entire market…." The ideology and percept are the same today.
Since 2022, the US and EU have pursued incremental sanctions on Russian oil in a bid to prevent Russia from monetising its oil wealth to realise its military ambitions. As the White House goes stricter on Iran's oil facilitation to China, aiming to thwart the Islamic Republic's efforts to further its "nuclear programme" (euphemism for nuclear armament), the oil market reacts with apprehension. "Teapots" (small private refineries around Shandong province of China) have gradually scaled down production. If sanctions on Iran's oil exports and a stranglehold on Russian supplies via secondary sanctions are meaningfully implemented, a sizeable portion of supply would cease to quench international thirst. Any semblance of sombre prices is difficult to fathom in such a scenario.
However, the narrative could change if the US goes soft on Moscow. Russia's dominance in the oil market would refrain OPEC from unilaterally tinkering with production quotas to avoid antagonising Moscow while negotiating the politics of the White House amid the present unpredictability.
The threats of tariff impositions and deeper sanctions collude with current geopolitical events to cast a shadow of uncertainty on the supply side of the coin. While the imminent revocation of the Venezuela sanctions waiver could tighten the market, diplomatic efforts on the Ukraine-Russia war indicate prospects of rising supply to compensate for any shortfall in the eventuality of tariff imposition on Canada and Mexico. Markets discount the inconsistencies, some purported, others merely speculative, as oil prices continue to be range-bound at the lower end of $70.
The US desperately seeks a larger share of exports worldwide, and climate concerns are waylaid as Donald Trump endeavours to introduce "a greater, stronger and far more exceptional than ever before, America". The inclusion of WTI Midland in the Brent basket in 2023 was a precursor to its emerging importance as a global oil benchmark, while Permian Shale oil production touched a new high.
American oil majors have expanded their footprints over the last decade with emerging opportunities and substantial discoveries in Latin America, the Caribbean and the African coast. Aware of such evolving supply channels and the growing participation of other non-OPEC sources, OPEC is reluctant to concede its share much longer. Most OPEC producers face fiscal constraints due to rising break-even costs in the present bearish phase, except Qatar and UAE. Saudi Arabia has already expressed its intention to gradually increase output from April onwards. With an average break-even price of $90, which continues to be breached, any sustained fall below $75 could create wider deficits and derail the Kingdom's Vision 2030.
Oil shall continue to permeate the fiscal straits of most economies for a very long time. Though geopolitical and economic factors remain prime determinants of price, survival remains paramount. Concessions and compromises shall perpetually prevail.