The latest OPEC+ output cuts for November mean it’s back to the drawing board for the White House and a re-emergence of discussions about the viability of “NOPEC”, a Western oil and gas buyers’ cartel that may or may not be the answer to influencing the market at will. The decision on Wednesday by OPEC+ to cut production by 2 million barrels per day at a time when the global economy is grappling with the continued negative impact of Putin’s invasion of Ukraine and Western sanctions, is an indication that the cartel is purposefully siding with Russia, and that oil and politics have become decidedly intertwined on a cartel level.
With President Joe Biden now vowing to “consult with Congress” on ways to “reduce OPEC’s control over energy prices,” the NOPEC bill, once again, comes to the forefront.
The current situation is reminiscent of the early days of the Ukraine war when the U.S. and Europe floated the idea of creating an oil and gas buyers’ cartel.
But the U.S. did more than talk. Back in May, the U.S. The Senate passed the No Oil Producing and Exporting Cartels (NOPEC) bill intended to protect American consumers and businesses from engineered spikes in the cost of gasoline and heating oil, despite some analysts warning that it could also have some dangerous and unintended consequences.
The bill would change U.S. antitrust law to revoke the sovereign immunity that has long protected OPEC and its national oil companies from lawsuits, giving the U.S. attorney general the ability to sue the oil cartel or its members in federal court. However, it remains unclear exactly how a U.S. federal court could enforce judicial antitrust decisions against foreign nations, not to mention that other countries could retaliate by taking similar action on the United States, for example for withholding agricultural output to support domestic farming.
Oil Buying Cartel
Earlier in the year, Italy’s prime minister, Mario Draghi, hatched a radical plan to contain the oil price hike. The former European Central Bank president floated the idea of creating a “cartel” of oil consumers at a meeting with Joe Biden in order to increase their bargaining power similar to how the biggest oil-producing nations came together through OPEC to agree annual oil production quotas.
The two met at the White House on Tuesday in order to coordinate their positions on Russia’s invasion of Ukraine and the economic fallout from the conflict.
“We are both dissatisfied with the way things work, in terms of oil for the US and in terms of gas for Europe. Prices don’t have any relationship with supply and demand,” Draghi has said.
According to Brussels thinktank Bruegel, since September 2021, Germany, France, Italy and Spain–four of the largest EU economies–have each spent €20bn-€30bn to artificially lower energy prices. However, these subsidies are viewed as less than ideal since they help to fund Moscow, drain public finances and harm the environment.
Draghi and Biden also discussed implementing a cap on wholesale gas prices, an idea pushed by Italy within the EU. But many European leaders were at first opposed to placing price caps on Russian oil and gas. According to the European Commission, an oil price cap should only be a last resort for an emergency, such as in the event Russia cuts off all gas to the EU. The EC’s decision appears to have been swayed by a cross-section of analysts who have argued that caps could imperil the EU’s climate goals, by encouraging more consumption of fossil fuels.
Roberto Cingolani, Italy’s minister for ecological transition, did not take the opposition lightly:
“Countries that oppose [the idea] defend the concept of a free market … this free market has allowed gas prices to increase five or six-fold without there being a real physical reason, for example a shortage, which has affected the cost of electricity. Citizens are unable to bear the costs, and businesses suffer the high energy costs of manufacturing,” he has told the Guardian.
It’s only recently that everyone got on board, with European Union ambassadors reaching an agreement on Wednesday to impose a new package of sanctions on Russia, including banning maritime transportation for Russian oil to third-party countries unless the oil is sold below or at a certain price cap.
But European leaders have been more receptive to the idea of creating a natural gas-buyers’ cartel after the EU agreed in March to use the union’s considerable heft to get better gas prices.
“We have important leverage. So instead of outbidding each other and driving prices up, we should pull our common weight,” the European Commission president, Ursula von der Leyen, declared.
This probably makes more sense, considering that before the Ukraine war 40% of EU gas and 25% of its oil came from Russia.
Meanwhile, Michael Bloss, a German Green MEP, suggested that the EU should create an oil-consumers’ cartel with other developed countries including the U.S., UK, Japan and South Korea which represent “a huge share of oil consumption” on the global market.
“If they together say this is the price we are going to pay, but not more, the sellers, they will have to abide by it … This special time needs special action.”
Previous versions of the NOPEC bill have failed thanks to heavy opposition by oil industry groups, including the American Petroleum Institute (API).
Several analysts have also warned that the bill could lead to unintended blowback, and OPEC nations could strike back in other ways. For instance, in 2019, for example, Saudi Arabia threatened to sell its oil in currencies other than the U.S. dollar if Washington passed a version of the NOPEC bill. Such a move would reduce Washington’s clout in global trade by undermining the dollar’s status as the world’s main reserve currency, while also weakening the U.S.’ ability to enforce sanctions on nation states. The Saudis might also hit back by buying their weapons elsewhere thus denying U.S. defense contractors lucrative business.
The Biden administration can also try and persuade non-OPEC producers to increase their production. In a rare move of solidarity last year, non-OPEC countries agreed to join OPEC in a production-limiting deal. But they, too, have been struggling to ramp up production in an unusually tight market. Non-OPEC oil producers are crude oil-producing nations outside of the OPEC group including the United States of America, Canada, and China.
Another big challenge: non-OPEC countries have high consumption levels and, thus, limited capacity to export. Indeed, many are net oil importers despite being high producers, which means they have minimal influence on oil prices. However, with the discovery of shale oil and shale gas, non-OPEC oil producers, particularly the United States, have enjoyed increased production and greater market share in recent times. While this has been a game-changer of sorts, shale oil technology requires substantial upfront investments, which acts as a deterrent to shale oil producers.
So far, the jury is out as to whether non-OPEC producers can have a material impact on the price of crude oil. High production levels from non-OPEC members from 2002 to 2004 and again in 2010 failed to trigger price declines and instead brought about higher oil prices, mainly because they lacked sufficient market share to affect oil prices. High production from 2014 to 2015, however, did cause prices to decline with pundits opining that the decline in prices was the result of an increase in supply from OPEC producers with their market share threatened by non-OPEC producers.
That said, an EU-led cartel might actually work.
Back in April, the EU launched the Platform for the common purchase of gas, LNG and hydrogen. The Platform is intended to help ensure security of supply, in particular for the refilling of gas storage facilities in time for next winter. The Platform has so far succeeded: Europe’s gas storage is running about nine weeks ahead of last year, an impressive feat even after flows from Russia have been severely curtailed. European gas storage levels are close to 90%, and have even surpassed the 5-year average, according to data from Gas Infrastructure Europe (GIE). As for actually controlling gas prices, the organization doesn’t seem to have had much success: the cost of replenishing natural gas stocks in Europe is estimated at over 50 billion euros ($51 billion), 10 times more than the historical average for filling up tanks ahead of winter.
Fri, 10/07/2022 – 10:46
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Author: Tyler Durden