13 Apr Why is Trump promoting an agreement between oil-producing countries?
We live in a complicated scenario where we no longer know what the interests of each party are. We are seeing how Americans, already submerged and undoubtedly in the worst crisis of the 21st century, are fighting for the opposite to happen to what any ruler who is not from an OPEC ++ country would like, and that is that the price of a barrel of oil go up.
Oil has been by definition the most inelastic market of all the markets in the world. Furthermore, in my time as a teacher I used this market to explain, in the opposite way, what the elasticities of markets are. And its inelasticity was derived, and I say was and is not, in the difficulty of closing and opening the oil wells on demand. Thus, if the demand rose or fell, this was reflected in the price immediately, since the offer could not be adjusted.
The arrival of shale oil, that is to say, of the oil obtained by the fracking technique, came to correct, at least in a good part, this inefficiency of the market.
A few years ago, the Arabs and particularly Saudi Arabia, seeing that a great new enemy was entering the market, coinciding with the lifting of the historical export restrictions to Iran, tried to kill him before he grew up, and caused a sharp drop in price for excess production. They thought that if the price did not cover their break even, of the order of 60 dollars at that time, the Americans would not be able to pay their financial loans and they would fail. But it was not so and they had to back down.
Three things have happened since then and I don’t know which one is more important. The first, that they have reduced their break even, already having wells like the Eagle Ford that have it at $ 42; the second that the US it has become a net exporter of oil, making it independent from the world in oil terms; and third, that many American states now depend on this new economic source.
This is where we must look if we want to understand why the Trump administration fosters an agreement between producing countries to drastically reduce oil production and, therefore, that the price of a barrel increases dramatically.
Initially any ruler should want a cheap barrel in situations like today. No doubt a cheap barrel will allow for a faster economic recovery, but in this situation of economic collapse Americans find that many critical states see such a drastic drop in the price of a barrel makes it unfeasible to keep its facilities for obtaining shale oil open. Particularly in states like Wyoming, Utah, Texas and Colorado, the first three states that have consistently voted Republican and the last, Colorado, a desired state in their electoral career.
We will therefore see a reduction in production agreement, which at the time of writing this article has not been produced, but which, most likely when the reader reads it, has already occurred. It will be a significant reduction, far exceeding the 10 million barrels per day agreed last week, which was more or less than 10% of production.
And now we must ask ourselves, does this harm us or does it benefit us who are not invited to this party, but who are invited to pay for it?
Well, the answer has two faces. The first one a cheap barrel would help a faster recovery. I think it is not necessary to explain why, it is evident. But the second, much more complicated to explain but as important as the first, tells us that, in a moment of artificial creation and creation of money, that is to say, of monetary mass that somehow reaches us, among other things, through public debt, we need inflation, at least so that the ratio of our public debt to GDP does not make it unpayable. And today the most inflationary element that exists is oil.
So, let’s not discard the benefits of having a barrel at $ 50. Obviously not $ 90, but not $ 20 either.
This inelasticity of the market of which I spoke before has come to cause some producers to be forced to close wells, but not because they are not profitable, but because consumption has dropped so much that they have nowhere to store it. As of today and according to IEA data, 100% of the world’s oil tankers are full of oil, a situation that has never occurred before. And this is not good, because we can end up causing the fall of someone who does not get up so fast and is from the distributors. And let’s not forget, clean energy is very good and highly desired, but at the moment we have oil for a while.
Source: Funds People