Realist, not conformist analysis of the latest financial, business and political news

But The Oil Price Isn’t Controlled By Three Men – Not Even Three Companies Nor Countries

We have a rather blood curdling assertion from Bloomberg that three men now control the oil price. The only problem with this is that sure, Bin Salman, Putin and Trump have influence but the idea that they control the price is ludicrous.Two of them are more controlled by it, the third has let slip the reins of power on that front. The point being that fracking has entirely changed the global oil market and price structure – it’s about time my fellow journalists caught up with that.

The Oil Price Is Now Controlled By Just Three Men

No, really, just no:

OPEC has lost what control of the oil market it ever had. The actions (or tweets) of three men — Presidents Donald Trump and Vladimir Putin and Crown Prince Mohammed Bin Salman — will determine the course of oil prices in 2019 and beyond.

No, they won’t. They’ll influence, rather more than my consumption of oil products will influence to be sure, but they won’t determine.

It was Saudi Arabia and Russia that led the push in June for the OPEC+ group to relax output restraints that had been in place since the start of 2017. Both subsequently jacked up production to record, or near record, levels. U.S. output soared unexpectedly at the same time, as companies pumping from the Permian Basin in Texas overcame pipeline bottlenecks to move their oil to the Gulf coast.

These increases, alongside smaller downward revisions to demand growth forecasts and President Trump’s decision to grant sanctions waivers to buyers of Iranian oil, have flipped market sentiment from fears of a supply shortage to concerns about a glut in the space of three months.

Influence, yes, not determine.

Bin Salman and Putin, sure, they’ve great influence over how much oil is produced in their nations, how much is exported. The Saudi rather more than the Russian, as Aramco is still state owned, most Russian companies not so. But equally both countries, and thus both autocrats, depend upon oil revenue to stay afloat. It’s physically possible for S Arabia to insist upon halving oil exports. Economically they’d be bust within months and a certain Crown Prince would be hanging by his heels from a gas station portico.

There’s less power there than most assume. Trump on the other hand has very much less power. The US now no longer limits crude oil exports. So there isn’t really a lever that a US President can pull. He can’t tell the fracking companies where to drill nor how often. Not even whether. There’s no regulation of exports – there’re just no levers to pull any more.

That means that the oil price is really determined not by these three politicians but by the balance of supply and demand in that market. And that’s been changed irrevocably by that rise of fracking. When any of thousands can just go out and, for a few million $, drill a well that produces immediately and lasts 18 months in any volume then we’ve a completely different market from when it took decades and billions to bring a field online. We have elastic supply that is and that’s a situation where no one politician nor oligopolist does have any great power.

That is, technology has taken that market power away from the politicians. The oil price is now driven by the dispersed decisions of thousands of frackers, they’re the global marginal production. A pity for the poses of the politicians but great for the rest of us.

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