The oil industry and the free market are not well acquainted. The price of oil has long been manipulated more by cartels than by free markets. Since the 1970s, the manipulator in chief has been the Organization of Petroleum Exporting Countries (OPEC) and its collaborators (OPEC+).
The recent collapse in the price was the result of OPEC and Russia breaking ranks. Saudi Arabia then decided to administer a slap on the wrist to the Russkies by opening the taps in order to collapse the price (and Russian profits). But now all is harmonious again. OPEC+ is co-operating to withhold millions of barrels per day to push prices up.
And in a new wrinkle, even non-OPEC+ producers are tightening supply. For example, major Canadian tar sands producers, including Canadian Natural Resources, Suncor and Syncrude, have all coincidentally scheduled maintenance in the coming months that will idle about half a million barrels a day. This may not be deliberate, but it certainly helps the cause.
There is also pressure on the Americans to exhibit self-control and not unleash a fracking binge as prices rise post-pandemic.
When fracking took off in the U.S. earlier in the century, production exploded, dramatically increasing world supply and putting downward pressure on prices. OPEC+ was seriously annoyed. Ultimately American investors weren’t all that happy either. As one investor put it, “Growth got us more barrels. It got us too many barrels. It got us low prices. It got us weak returns.” And investors don’t appreciate weak returns. So now the pressure is on for American frackers to exercise some self-discipline, put more revenue into dividends and less into ever more drilling.
“‘Drill, baby, drill’ is gone forever,” crowed Saudi energy minister Abdulaziz bin Salman. He continued, “The U.S., Saudi Arabia, Russia, Canada, Brazil and other countries well-endowed with hydrocarbon reserves…we need to work with each other, collaboratively.”
So at the moment everything is under control. OPEC+ and their new allies are pushing the price of oil back up over $60 per barrel. How long will it last? When will one of the club’s members demand a bigger piece of the action? How long can American oilmen contain their instinctive urge to drill? What happens when tar sands companies conclude their maintenance?
The solidarity will, I suspect, be short-lived. The unravelling should be interesting.