Has the oil price finally hit a turning point? More investors are banking on reduced output and rising prices. This is a good thing, to a certain extent, Rolf Wenkel finds.
Since mid-January, crude oil prices on the international market have increased markedly. Just three weeks ago, a barrel of the benchmark North Sea Brent oil was going for less than $29. Now the price has briskly risen to $35 - a 20 percent increase. Investors are betting that an agreement between Saudi Arabia and Russia to freeze crude oil output at their January levels will take hold.
Qatar and Venezuela have also agreed to this deal, reached in Doha. It will only work though if the other big oil-producing countries take part as well. Saudi Arabia's regional archnemesis Iran has asserted itself again on the oil market after the lifting of western sanctions. Tehran originally announced to raise its output of oil from 2.8 million to 3.3 million barrels per day. Now, surprisingly, Tehran is welcoming the Saudi-Russian initiative.
Is this the turning point for oil prices? And if so, who does this help and who does this hurt? The massive drop in oil prices over the past year and a half has put consumers in a huge buying mood and relieved energy-intensive industries. It was a mini-stimulus program, so to speak. But it also had its down sides.
The US has risen to join Russia and Saudi Arabia as one of the world's leading oil producers, thanks to the controversial "fracking" technique, which squeezes oil out of fractured rock. Yet while the Saudis are now scraping by with prices around $35 per barrel, many producers of fracked oil need to be bringing in much more to stay profitable. The consequence: the industry must make cuts, dismiss employees and reduce investments. And banks that have extended millions of dollars of credit to the industry must brace for a tough road ahead.
Saudi Arabia has so far tried to dry out American frackers by glutting the market. But it's doubtful whether this strategy will pay off. First, this has caused gigantic losses of revenue to Saudi Arabia itself, leading to a state deficit of nearly $100 million. And second, Saudi Arabia can't turn back time. The fracking infrastructure in the US is already in place, and it will be fired back up again as soon as output-cuts turn the crude oil price trend around.
Saudi Arabia has already tried once before to wipe competition out by flooding the oil market. In the mid-1980s, the Saudis pushed the oil price down 60 percent, wanting to starve North Sea producers with their relatively expensive oil rigs. The fact that North Sea Brent oil sets the benchmark price on the international market to this day testifies to the plan's failure.
Even if Saudi Arabia were to rethink its questionable strategy, an output freeze would hardly be enough to lift oil prices up considerably higher. The Saudis will have to noticeably reduce their own output until the oil price normalizes - Venezuela's government dreams of $70 per barrel as a fair and reasonable price.
This price would presumably be acceptable to other oil-producing countries. The recognition has spread that, though it seems like a stimulus program at first, cheap oil has its downsides, and not only for the developing economies that depend in large part on oil revenue.
The environment suffers
The environment too belongs on the list of losers in a world of persistently cheap oil prices. When a barrel of crude oil cost $110, gas-guzzling SUVs in the US were sent to the dump. Now they are selling again like hot cakes. And the longer the oil price stays at such a low level, the less it seems worth it to conserve this finite resource, to produce more efficiently, to demand renewable energy sources.
The lesson is clear. The prices must rise for this reason alone, in order to make us aware again that this lifeblood is limited and that we are still far too dependent on oil - like a junkie before a needle.
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