Friday 1 March 2024

As global oil prices continue to soar the world will have to pin their hopes on Iran Nuclear talks that could rescind US sanctions against the Persian Gulf state

By Governor Makhubela

As of 16 November 2021 (10:37GMT), the price of Brent crude oil was at 82.55USD. The last time oil prices closed above 80 dollars per barrel was in 2014. Reuters recorded that Liquified Natural Gas (LNG) rose to 38.50 USD per million BTU in October 2021 from the 2021 low of 5.60 USD, a staggering 600% surge.

It is thus not surprising that the demand for oil increased as Europe and Asia substitute the highly priced LNG. The declining inventories in the biggest consumer of crude, the United States (US), have further spurred demand for crude oil further pushing up crude prices. In October world leaders including US President Joe Biden, called on Russia, Saudi Arabia and the United Arab Emirates (UAE), amongst other major oil producers to increase production. The 22nd November OPEC and non-OPEC Ministerial Meeting stuck to their previous plans of only increasing production by 400 000 barrels per day, shrugging off the pressure from major customers.

OPEC's chair, Prince Abdulaziz bin Salman, said "Oil is not a problem". He added that OPEC-Plus manages oil better than other sources of energy such as gas. Since March 2021, the price of crude increased by a third while the gas price rose four times its March 2021 price. Some believe that the intransigency from OPEC to reduce prices is not driven by the desire to get rid of inventories that increased due to COVID-19 lockdowns which suffocated demand for oil, driving its prices to all-time lows in the last quarter of 2020. Instead, global pressure to phase out fossil fuels has compelled OPEC countries to reap higher revenue from oil, a move that will assist them to build financial reserves that will transition them towards renewables.

Not all countries in OPEC believe that oil supply should be increased to stem the global surging oil prices. Over the years the UAE has been growing frustrated over the gap between its production capacity of 4 billion barrels per day and its actual production output. Since the 2014, the United Arab Emirates (UAE's) has adopted an aggressive energy policy stance driven by Mohammed bin Zayed, after his brother Sheikh Khalifa bin Zayed suffered a stroke. The de facto leader has sought to cement his control of the oil and gas sector in 2016 by shaking up the Supreme Petroleum Council. Replacing an older cohort of conservative technocrats and advisers enabled a fresh approach to the energy policy.

Due to the new energy policy stance, the Abu Dhabi National Oil Company (ADNOC) embarked on major investments in its downstream refining and petrochemical operations. The company has been rolling out its five-year $3.5 billion investment to add a third refinery at its Ruwais operation. It is expected the new capacity would boost production by 600 000 barrels per day by 2025, lifting total refining capacity to 1.5 billion bpd. However, the strong alliance between Saudi Arabia and Russia within OPEC has dashed the UAE's ambition to fully utilise the installed capacity, because it is at odds with the cartel's oil price management mechanism. The UAE's frustration over OPEC reached boiling point in 2020 when Abu Dhabi threatened to leave the organisation. In July this year, OPEC held a bruising meeting in which Abu Dhabi demanded again an increase in supply. The 8th largest producer lost out once again to Russia and Saudi Arabia.

The alliance between Russia and Saudi Arabia is of concern for US President Joe Biden since his administration and the rest of the developed countries want an end to the suffocating oil price. The US lost sway over Saudi's energy policy around 2014 and 2016 when Riyadh wanted to undermine the US shale oil project. By extension, the US lost its influence over the oil price. According to the US Energy Information Administration (EIA) both the US and Saudi Arabia produced 31% of the global oil output. An alliance between Saudi Arabia and Russia has thus rebalanced US dominance over oil prices as the two countries account for 22% of global oil output against 20% US output.

However, there is a silver lining in the complex global geopolitical setting. The US is now seeking to reverse former President Donald Trump's sanctions against Iran. The diplomatic talks between the two countries alongside other five parties including China, the UK, France, Germany, and Russia are set to resume by the end of November 2021 in Vienna. Hopefully these negotiations can bring about relief on oil prices.


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