Opinion
No, crude prices are not headed for $150 a barrel
Summary
- Politicians in the US and Europe, and large oil exporters will do everything in their considerable power to prevent this as it goes against their self-interest
Now that oil has hit $95 a barrel, analysts have started to forecast higher prices. Estimates go all the way up to $150 a barrel, as in the case of JP Morgan’s energy analysts. This is followed by sympathetic projections of the likely impact on India’s macro fundamentals. It’s time we put a lid on this line of punditry. Oil prices are not going to go crazy.
The first reason is that US President Joe Biden trails his likely opponent Donald Trump by 10 percentage points in the run up to the 2024 election, according to a recent Washington Post-ABC poll. While the poll has been widely panned, there is every reason for President Biden to work a little harder to make himself more agreeable to the most important Joe in an election year – the average Joe. That means containing the price of gasoline at the filling station.
Americans have been trained by generations of political punditry to treat gas prices as the surest measure of their cost of living, the efficacy of an American president, and the viability of the American Dream. President Biden will do whatever it takes to keep oil prices low. And there is much that the ‘leader of the free world’ can do to bring oil prices to heel.
Second, growth this year is sluggish across the world. The OECD’s latest forecast of global GDP growth, released last month, puts the figure at 3% in 2023 and 2.7% in 2024. Low growth kills the demand for oil. In fact China’s failure to zoom back to its normal, scorching pace of growth even after lifting covid-related restrictions provided the reason for Saudi Arabia and Russia to cut oil production in order to boost sagging prices. This means that, but for artificial production restrictions, the price of oil would be falling. The oil cartel OPEC and its ally, Russia, jointly known as OPEC Plus One, have good reasons to calibrate production cuts to keep prices high but not so high as to kill demand altogether.
Third, the world’s largest oil producers do not have an incentive to facilitate the energy transition that would destroy demand for their chief revenue generator. Large parts of the world, including the US and Europe, are trying to move from vehicles powered by internal combustion engines to those that run on electricity. America’s Inflation Reduction Act earmarks billions of dollars of subsidies for this. Electric vehicle manufacturers, charging infrastructure developers, battery makers, suppliers of key minerals, and people who choose electric vehicles are all in line for liberal handouts from Uncle Sam.
But when it comes to persuading car buyers to switch en masse from conventional cars to EVs, a huge rise in the cost of gasoline and diesel would be even more powerful than these subsidies. Saudi Arabia and Russia are rational states, not particularly prone to bouts of suicidal anxiety. Why would they constrain production enough to accelerate the dumping of petrofuels for mobility?
Four, the Ukraine war, a prime driver of food and fuel inflation, is a war of choice. Russia has annexed parts of Ukraine to maintain land routes to its all-weather naval base in Crimea and will fight to retain this access. For the West, supporting Ukraine in opposing Russian occupation of their land is also a matter of choice. It is a convenient way of degrading and draining Russian military resources without putting any Western lives at risk. If the political discomfort from sustained inflation outweighs this convenience, the West will likely choose to stop supporting Ukraine.
The unrest among Polish farmers over Ukrainian grain being shipped by river and instead of the traditional route via the Black Sea, thus lowering the price of locally produced grain, has forced the Polish government to cool its enthusiasm for arming Ukraine. The electoral victory of a Russia-friendly party in Slovakia will add to the pressure within Europe to bring the war to an end.
The Germans are up in arms against their government’s move to switch residential heating to new-fangled, electricity-driven heat pumps, a proximate driver of which is the shortage of gas thanks to Russia. Policymakers and citizens alike would welcome an end to the war and resumption of easy access to Russian gas. Ukraine’s so-called summer offensive to recapture land from the Russians has more or less fizzled out. The West must now decide whether it wants to face another winter of gas shortages and high prices to keep the war going. The pressure to find a way to end the war is mounting. That would translate into lower oil prices.
A Biden administration, which wants to lower oil prices before his impression as an incompetent president becomes entrenched ahead of the 2024 presidential elections, also stands to gain from helping President Zelensky negotiate honourable terms of peace with Russia.
The self-interest of politicians in the US and Europe, as well as of major energy exporters, lies in preventing any large rise in the price of oil. Who wants to bet that the technical skills of energy forecasters outclass politicians’ instinct for self-preservation?
