The recent oil price rally has been driven, in large part, by Saudi Arabia’s and Russia’s efforts to cut supply to the global crude market.
Both China and the West are negatively impacted by high oil prices and will be eager to bring prices down using all the weapons at their disposal.
Ultimately, the price of oil going forward will be determined by the willingness and ability of these two interest groups to influence prices.
There are three key determinants of how high oil prices will go from here. First, whether it is in the financial interests of the key players who have been pushing them higher to keep doing so. Second, whether it is in their geopolitical interests to keep doing so. And third, what other oil market players negatively affected by rising oil prices can do to bring them lower again.
The first determinant is that it remains absolutely in the financial interests of Saudi Arabia, Russia, and the rest of the OPEC+ cartel to keep oil prices going up – the higher the better. Over and above the nonsense about balancing oil markets, the real reason that Saudi Arabia has for driving oil prices higher is simply that it needs the money. The money from oil (and from its hydrocarbons sector more widely) is the foundation stone of all funding for the Saudi state and for the ongoing power of the Royal Family, as analyzed in full in my new book on the new global oil market order. It is used to effectively subsidize large swathes of the economy, without which employment would fall, taxes would rise, and the social benefits of housing, education, and health, would cease to function properly. This money is funneled not just directly into subsidies for these areas but also into major projects that have nothing to do with the oil sector from which the funds emanated. Examples of such projects include developing a US$5 billion ship repair and building complex on the East Coast, creating the King Abdullah University of Science and Technology, and the US$500 billion Neom project. Any failure to keep delivering on these massive socio-economic projects funded almost entirely from hydrocarbon revenues would dramatically increase the likelihood of the removal of the Royal Family, and they know it. Consequently, the official fiscal breakeven oil price of US$78 per barrel (pb) of Brent for Saudi Arabia is irrelevant. In practice – as the fiscal breakeven oil price is the minimum price per barrel that an oil-exporting country needs to meet its expected spending needs while balancing its official budget – its true fiscal breakeven oil price has no set limit. The same considerations apply to virtually all other members of the OPEC grouping of OPEC+.
For the key player in the ‘+’ part of OPEC+, Russia, the same irrelevance applies to the official fiscal breakeven price. For around 20 years, it had a fiscal breakeven oil price of around US$40 pb. Following its invasion of Ukraine on 24 February 2022, this jumped to an official US$115 pb. Unofficially, though, as wars do not adhere to easily quantifiable and strictly adhered to budgets, the fiscal breakeven oil price is whatever President Vladimir Putin thinks it should be at any given moment. An additional element at play in Russia’s support for ever-higher oil prices is that it undercuts the oil prices offered by Saudi Arabia and other OPEC+ members with direct deals done with major buyers, such as China – so, again, the higher the oil price the better for it. Russia began to determinedly push Saudi Arabia and OPEC+ members into driving oil prices higher from the moment that a general US$60 pb oil price cap on Russian oil was introduced in December 2022. The higher OPEC+ members push the oil price, the higher Russia can secretly sell its oil above that US$60 pb cap.
On the second determinant, though, there is a key geopolitical reason that such oil price rises cannot keep going on forever, and this is China – the core geopolitical ally of both Saudi Arabia and Russia. Part of the reason why China will not continue to support oil price rises from OPEC+ is that it is a net importer of oil, gas, and petrochemicals, so higher prices negatively affect its economy too. Even now, its recovery from three years of over-tightly managed Covid is in question, and continued rises in energy prices will not help this. Certainly, it enjoys deeply discounted oil from Russia and from several other OPEC+ members, including Iran, Iraq, and even Saudi Arabia from time to time, but there is a limit on how much more prices can be increased without China really beginning to feel the economic pinch, even with discounts applied. China, though, will also feel enormous economic fallout from higher energy prices indirectly through the effect they have on the economies of the West – and these remain its key export bloc. The U.S., even with elements of the ongoing Trade War still in place, accounts for over 16 percent of China’s export revenues on its own. According to a senior source in the European Union’s (E.U.) energy security complex, and another source in a similar role in the U.S., the economic damage to China – directly through its own energy imports and indirectly through damage to the economies of its key export markets in the West – would dangerously increase if the Brent oil price remained over US$90-95 pb beyond the end of this year.
The third key determinant is that other oil market players do have options open to them to bring oil prices down again. Over and above the plans in place to bring Iran’s 3 million barrels per day (bpd) back into the oil market through a new version of the ‘nuclear deal’, other supply increases are also in the offing. According to the U.S. Energy Information Administration (EIA), combined non-OPEC producers are expected to increase production by 2.1 million bpd in 2023 and 1.2 million bpd in 2024. The agency expects U.S. oil production to exceed 12.9 million bpd of monthly crude production for the first time in late 2023 and expects output growth to continue into 2024 to put U.S. crude production at 13.09 million bpd. Other major non-OPEC increases are set to come from Brazil, Canada, Guyana, and Norway, according to the agency. The ongoing recalibration of demand towards gas is also likely to reduce demand for oil, and therefore help to bring down prices going forward as well.
An additional weapon for the U.S. to use against the OPEC group of OPEC+ is the final ratification of the ‘No Oil Producing and Exporting Cartels’ (NOPEC) bill. This legislation would open the way for sovereign governments to be sued for predatory pricing and any failure to comply with the U.S.’s antitrust laws. OPEC is a de facto cartel, Saudi Arabia is its de facto leader, and Saudi Aramco is Saudi Arabia’s key oil company. The enactment of NOPEC would mean that trading in all Saudi Aramco’s products – including oil – would be subject to the antitrust legislation, meaning the prohibition of sales in U.S. dollars. It would also mean the eventual break-up of Aramco into smaller constituent companies that are not capable of influencing the oil price. Adding to the unwillingness of the U.S. and its allies to tolerate further rises in oil prices is that several major European countries – including Germany – have been investing substantially more in non-fossil technology, which has been seen in a notable decline in their OPEC+ dependency.
The oil price being targeted within the next six months by the West, according to the E.U. and U.S. energy security sources spoken to exclusively by Oilprice.com last week, is a maximum of US$75-80 pb of Brent. During the presidency of Donald Trump, this was the top of the range analyzed in depth in my new book, as it was seen as the price after which economic threat becomes apparent to the U.S. and its allies, and a political threat looms for sitting U.S. presidents. The floor of the range was a Brent price of US$40-45 pb, which was regarded as the price at which U.S. shale oil producers can survive and make decent profits. When Saudi Arabia (with the help of Russia) was pushing oil prices up over the US$80 pb of Brent level in the second half of 2018, Trump in a speech before the United Nations General Assembly said: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. […] We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” In short, during Trump’s entire presidency, the US$80 pb oil price ceiling was breached only once for a period of around three weeks toward the end of September 2018 to the middle of that October.
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