"This is all the energy industry truly needs."
JUST before one of the busiest seasons for travel in the Philippines, crude oil saw a sharp price drop, giving Filipino drivers in most cities and provinces the gift of a lower gas price of about P50 per liter. Despite the good news, though, some experts suggest the low prices at the pump would not last.
In early December, OPEC, as well as oil-producing allies such as Russia, decided to cut the output of oil by 1.2 million barrels a day. The cartel’s biggest producer, Saudi Arabia, announced it would cut its production even further, despite calls from US President Donald Trump to maintain the current output levels.
The goal is to bring the price of oil up after OPEC and Russia ramped up production in the summer and fall following America’s reimposition of sanctions against Iran.
Afraid that the market would react negatively, Trump pressured OPEC then to produce more. The result was a drastic cut in prices, as the supply increased considerably. But just a few months after this shift, Saudi Arabia changed its mind.
Using its power within OPEC and the partnership with Russia to crush any dreams Trump may have had of keeping gas prices cheap through the end of his term, the Saudi kingdom brokered a deal with the world’s top oil producers to take 1.2 million barrels per day off the market in the first six months of 2019. To experts, that means oil prices will soar again by the summer.
But, despite how news outlets are covering the decision to manipulate the oil market now, this isn’t the first time OPEC and Russia have shaken on a deal to cut their production in an effort to boost prices.
In late 2016, the oil giants also decided to expand production cuts, lowering oil output by 1.3 million barrels a day. But the results did not meet their expectation, as the barrel was being sold for $50 a pop by mid-2017 despite the output cut.
What happened? Well, US shale oil producers reacted to the OPEC supply cut by producing more and the supply was, once again, boosted, prompting the price to drop.
As Olav Dirkmaat, a top-down contrarian investor and bottom-up Hayekian economist, explained, it would take a major rise in interest rates to keep US shale oil producers from being able to aptly compete in the global market. And, with the US Federal Reserve showing no signs that it plans to announce a substantial rate increase any time in the near future, it wouldn’t be far-fetched to think that the Saudi plan may not work as well as the kingdom is hoping for.
Unfortunately, Philippine drivers are still forced to be at the receiving end of this global battle for oil dominance, in spite of the fact that the market has changed considerably in recent years and the monopoly that once ruled the industry is no longer invincible. Still, the fact that we’re even discussing the fact this monopoly should be brought down is a positive change.
All the energy industry truly needs is a free market for the OPEC to be dismantled and for Saudi Arabia, a direct sponsor of terrorism, to completely lose its main source of revenue. Only then would we finally know what really low prices truly feel like.
Question: If capitalism isn’t greedy, then why do some companies charge exorbitant prices for critical products like gasoline and life-saving drugs? Aren’t they gouging us to reap excess profits?
Answer: Profit is a critical indicator of consumer demand and the only way to ensure that there will be a sufficient supply of anything. By the way, profit is among the smallest components of oil and drug prices.