OPEC+ is markedly reducing oil production - in fact, the exporting countries will pump about 1 million barrels less per day. We have written earlier on why this is so.
As a result, supply at the market has become lower, so prices have gone up and are approaching $100 per barrel again.
What will the U.S. do after the OPEC+ statement?
The coming energy crisis and the high inflation it causes are scaring the whole world, but it's the States that are worried the most right now:
- expensive oil means expensive fuel;
- it's causing prices of almost all commodities to rise;
- inflation is going up - the Fed keeps tightening policy;
- high key interest rates are pushing the U.S. closer to recession;
- in addition, high fuel prices can cause social discontent.
To prevent this, the U.S. is trying to influence the largest oil producers and keep prices down. Otherwise, the Democrats will most likely not win the congressional elections. They are due in a month.
The U.S. started to prepare in advance: President Biden flew to Saudi Arabia this summer and persuaded the U.S. to bring down oil prices. But it did not work out very well: OPEC acts in its own way and does not want to listen to Americans. As a result, the failed negotiations with the Saudis have further diminished the credibility of Biden and the Democrats' ability to influence oil, inflation and economic stability in the United States.
However, the Biden administration is not giving up; they have a few more options - rather radical ones - on how to lower oil prices.
Additional Oil Release
The safest, though least effective, option is to further draw oil from strategic U.S. storage facilities. In response to OPEC+'s decision to cut production, Biden announced that the U.S. would release 10 million barrels of oil, even as storage reserves are depleted.
That would be all well and good, but the announcement had little or no effect on oil prices, especially compared to the previous similar decision to release 180 million barrels to the market. No wonder: the volumes are not comparable.
In addition, since U.S. storage reserves are running out, there is a risk that they will not be enough for a rainy day: in case of sharp reductions in domestic production (for example, during hurricanes in the Gulf of Mexico) or imports (if OPEC+ countries reduce exports).
Reducing military aid to the Arabs
Democrats have drafted a "Tense Partnership" bill in response to OPEC+ and specifically the alliance's leaders, Saudi Arabia and the UAE. They are accused of "a hostile act against the United States" and "siding with Russia in the conflict with Ukraine."
As revenge, the U.S. could withdraw its troops from these countries and stop supplying weapons and other military aid to fight neighboring states and terrorists. This includes protecting oil infrastructure from attack.
This option also has disadvantages: without U.S. military support in these countries, there could be problems that would inevitably affect the global oil supply. After all, if military actions or terrorist attacks affect the oil fields or storage facilities of Saudi Aramco, oil will cost even more, and such attacks occur quite often.
So even if the Saudis and the UAE will not reduce exports in response to the withdrawal of troops and reduction of arms supply, there is a good chance that sooner or later the fighting will make prices go up.
In addition, Saudi Arabia has already planned to prepare for a possible conflict with the United States. For example, in the spring the Saudis said they were going to explore ways to move away from the petrodollar - that is, not to use bucks in the black gold trade. In this case, the demand for the dollar could fall dramatically, especially if other oil-exporting countries do the same.
NOPEC: Conflict with OPEC+
Amid disagreements with OPEC, the U.S. may return to the "oil production and export cartel law," NOPEC, to have more leverage on oil exporters.
In this case, U.S. courts will be able to consider antitrust suits against OPEC+ and in general against countries involved in cartel collusion in the oil market. Under the decision of their own courts, the U.S. will be able to impose sanctions, confiscate property of these countries and put pressure on them in other ways. At the same time, the U.S. itself will indicate what is legal and what is not, thus assessing any actions of the countries that regulate oil production and prices.
This option also has a disadvantage: sanctions on exporters would also hit the U.S. itself. If oil prices become lower, the U.S. oil industry will also be hard hit: domestic production will decrease and it will have to import more. And since the market is competitive, and the U.S. in this case will be "enemies of OPEC +", they will have to buy oil more expensive.
So, even if the U.S. takes a drastic step - provoking a conflict with Saudi Arabia or the UAE, or starting a sanctions war with OPEC+ - all this will have a negative impact on themselves.
Can't sanctions be lifted on Venezuela?
As we can see, the U.S. has almost no normal options left to influence the oil market. Nevertheless, the U.S. says it is not going to remove sanctions from Venezuela yet, despite the fact that this would help get more oil on the market and lower oil prices. We may see some new rhetoric in this regard, but no change for now.
The Iran deal has also been stalled so far: there is no news or movement on it. Although it is possible that disagreements with the Saudis may attract the U.S. to support Iran, because these are the two sides of the Arab conflict.
On the one hand, Iranian oil would help to increase supply, but there is a nuance here as well: the reserves in this country are not grandiose, moreover, most of the oil is already exported in circumvention of sanctions.
So what to do with Brent and WTI crude oil prices in 2022?
If we discard all of the above options, then all we have to do is sit back and watch oil go up in price. The outlook is also bad: even if the world starts a recession and the demand for oil decreases, OPEC+ is already reducing production and adjusting to negative expectations, and also the supply from Russia may decrease if the embargo comes into force.
And if that's the case, U.S. inflation will be high. And given the strong labor market, the Fed may raise the rate even more than 1.25% by the end of the year, and it is not certain that it will slow down next year as well. If rates remain high for a long time, the risk of recession in the U.S. is very high, and stocks and cryptocurrencies will have no fuel for growth. As a result, the economy will have a hard time: liquidity is scarce.
If the U.S. starts to act sharply, the dollar is at risk: the "oil" countries can give it up to reduce dependence on the United States. But if the U.S. does nothing, tightening Fed policy will keep the dollar very strong - though at the cost of high inflation and recession.
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