The world of crude oil has entered crisis mode.
The world is facing an energy crisis “much bigger” than that of the 1970s. Fatih Birol, the executive director of the International Energy Agency (IEA), told German daily Der Spiegel in an interview last Tuesday. .
The IEA, the energy watchdog of the Organization for Economic Co-operation and Development (OECD), was created in the aftermath of the 1973 Arab oil embargo.
“At the time, it was all about oil,” Birol told the outlet. “Now we have an oil crisis, a gas crisis and an electricity crisis simultaneously.”
In 1973, politics turned the world of crude oil upside down. Major Arab producers chose to ban oil supplies from major Western countries, due to their support for Israel during and after the 1973 Arab-Israeli war. Crude markets went wild and major oil-producing countries oil took control, for the first time, of market fundamentals. Prices have risen and the scarcity of supplies has led to long queues at gas stations across most of the world.
Pure politics caused this gross 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 goals – that’s the mantra delivered to Arab and OPEC oil producers.
But despite all the rhetoric, the world of crude oil is back in crisis mode – thanks to politics. And unlike the 1970s, today it is consuming nations, not producers, that use oil as a tool to advance their political goals.
Citibank’s global head of commodities research, Ed Morse, points out that oil is overvalued at around $120 a barrel and is expected to approach $70. Brent crude is expected to fall significantly as demand declines and recession fears loom, Morse argued in an interview with Bloomberg on Tuesday.
And we can blame political interference.
The world would have been in a comfort zone if oil had stayed in the US$70 range. This range would also have meant lower oil revenues for Russia – fulfilling the main purpose of the coalition trying to punish Russia for invading Ukraine.
But to punish Russia, the European Union agreed last week to cut its oil imports from there. After lengthy haggling, EU leaders agreed to cut Russian oil imports by around 90% over the next six months. Currently, the 27-nation bloc depends on Russia for 25% of its oil needs. This could further stretch the supply side of the global energy balance.
However, the EU did not opt for a total ban on the import of natural gas from Russia anytime soon. The bloc imports 40% of its gas – for everything from power generation to heating homes – from Russia. Finding other sources of natural gas supply is more difficult than for oil.
“Russian oil is much easier to offset…gas is completely different, so 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 European markets and to stabilize the global balance between supply and demand, considerable pressure has been exerted on the Organization of the Petroleum Exporting Countries (OPEC) to increase its production quickly.
After tough political negotiations with US President Joe Biden and his allies, and after winning major political concessions, Saudi Arabia-led OPEC finally announced on Thursday that it would increase production in July and August by a larger volume than expected. The OPEC+ ministerial group agreed to increase total production by 648,000 barrels per day (bpd) in July and August, compared to the original schedule of 420,000 bpd.
Nevertheless, some observers question the ability of OPEC members to reach the new level of production. Over the past few months, several OPEC members have been unable to meet their production quota commitments for one reason or another.
There has been considerable pressure on OPEC to separate politics from oil. However, ongoing efforts to strangle the flow of petrodollars to Russia are pure politics in the face of a fragile global energy balance.
The common man is paying a high price for these ongoing political games.
Based in Toronto, Rashid Husain Syed is a respected political and energy analyst. The Middle East is his favorite area. Besides 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 maintenance requests, Click here.
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