Pump up the pressure: OPEC + wants oil prices to keep rising

Sascha: [00:00:03] From Equity Mates Media. This is the dive. I'm your host, Sascha Kelly. Last week, OPEC plus cut global production of oil by 2 million barrels a day. Let's unpack that sentence. Opaque is the Organisation of Petroleum Exporting Countries basically a global cartel controlling oil prices? So what is OPEC? Plus the new and improved version? And 2 million barrels, is that a lot? It feels like it's a lot. And we calculated that 2 million barrels of oil is enough to fill 127 Olympic swimming pools. That's the amount that they're cutting every day. And finally, reporting around this decision suggests that what we're seeing is the oil producers of the world siding with Russia over the United States. And as a result, the US announced they're re-evaluating their relationship with Saudi Arabia. As I said, a lot to unpack here. It's Wednesday, the 12th of October. And today I want to know what do I need to know about the Opec+ and their recent decision to cut oil production by 2 million barrels a day? To do this, I'm joined by my colleague and the co-founder of Equity Mates. It's Alec Renehan. Alec, welcome to The Dive.

Alec: [00:01:16] Sacha, a lot to unpack here. Let's try and keep it sharp.

Sascha: [00:01:19] Oh. Challenge accepted. Okay, Alec. Global oil consumption is difficult to conceptualise, so I've come up with a little bit of a game to help us frame what this 2 million barrel a day production cut will mean. Are you ready? Okay. The world consumes 100 million barrels of oil a day, which is the equivalent. I love this swimming pool thing. The equivalent of six and a half thousand Olympic swimming pools. I don't know the last time that you saw that many swimming pools in the one place.

Alec: [00:01:46] I love it that it's like Olympic swimming pools is the reference as well. Like I've never swam in an Olympic swimming pool. Give me how many backyard swimming pools in.

Sascha: [00:01:53] Oh well what like times that by four. So, you know, just rough estimates here. That's what we're doing. All right.

Alec: [00:02:00] So 100 million barrels of oil a day sounds like a lot. How many is that in litre?

Sascha: [00:02:05] 16 billion, roughly, of oil a day.

Alec: [00:02:08] Okay.

Sascha: [00:02:09] And so here's the game. What does the world consume? More oil. Okay, first, we'll start with two basics. Oil or water?

Alec: [00:02:17] Well, surely water. It feels like a bit of a trick question, but I'm I cannot believe that the world consumes more oil than water.

Sascha: [00:02:24] Well, what do they say? You should be drinking two litres of water a day. Sure. Well, you're right. The answer is water. We consume 10 trillion litres per day.

Alec: [00:02:36] Compared to 16 billion litres of oil. Yeah.

Sascha: [00:02:38] Bit of a trump to be otherwise. What about oil or Coca-Cola?

Alec: [00:02:44] Surely oil.

Sascha: [00:02:46] Yeah, you're right. But Coca-Cola, we do consume a lot of it. Like a lot. 475 million litres a day. Wow. Are you responsible for any of that?

Alec: [00:02:58] I actually am a Pepsi Max kind of guy.

Sascha: [00:03:02] All right. Controversial. Good to know.

Alec: [00:03:04] A separate episode on that.

Sascha: [00:03:05] Next time I have to buy you a drink, I'll definitely go for the Pepsi. And then my favourite oil or wine.

Alec: [00:03:12] Well, it's got to be oil. Yeah, I mean, all the world loves wine, but the world also loves oil. But I guess the question back to you with all the information here, what's more, wine or Coca-Cola?

Sascha: [00:03:24] I was rooting for wine, but it is Coca-Cola. We consume just 65 million litres per day of wine.

Alec: [00:03:32] Compared to.

Sascha: [00:03:33] 475 million litres of Coca-Cola.

Alec: [00:03:37] Okay. So what I'm taking from this game is we consume more water than oil, but less.

Sascha: [00:03:43] But that's it.

Alec: [00:03:44] But the drinks. The drinks aren't quite in the oils ballpark.

Sasha: [00:03:47] Yeah, the drinks aren't stacking up.

Alec: [00:03:49] I don't know if that really helped me conceptualise how much oil we consume, but it was a fun game.

Sasha: [00:03:54] I'm glad to hear it was a fun game. Like, it's always good to start with a laugh, especially when you're digging into a topic like this. So let's start with Opec+. OPEC is basically a cartel of 13 oil producing countries that together account for 44% of the world's oil production and 82% of the world's oil reserves. First, let's look at who makes up OPEC plus and why high oil prices are so important to them. OPEC plus includes the 13 members of the Saudi led Organisation of the Petroleum Exporting Countries, otherwise known as OPEC, plus ten non-OPEC producers led by Russia. Together, these countries control more than half of the world's oil output. And while there are disputes and sometimes failure to follow through on commitments, they generally work together to exert control over the price of crude in alphabetical order. These are the countries Algeria, Angola, Republic of the Congo, Equatorial Guinea govern Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates and Venezuela. Together, they set production limits, and by dictating the supply of oil, they dictate the price. So that's OPEC. What is OPEC+.

Alec: [00:05:03] Alex That's such a great explanation of opaque. So take OPEC and add another 11 major oil producing nations Azerbaijan, Bahrain, Kazakhstan, Malaysia, Mexico, Oman, the Philippines, Russia, Sudan and South Sudan. And you've got Opec+. And much like OPEC, Opec+ collectively make decisions about the global supply of oil. It was really formed in 2016 when oil prices were pretty low, and it was a way for OPEC to get more control over the price of oil, get more oil producing nations into the fold, into the cartel, and we have even more control over the price.

Sascha: [00:05:40] So in most areas of business, collusion between competitors is illegal, but it seems like it's just not for OPEC.

Alec: [00:05:47] Yeah, well, if you control the world's supply of oil, you have a lot of negotiating leverage. And the rest of the world certainly doesn't like it, but there's not really an effective mechanism to stop it. In theory, the World Trade Organisation is the forum for handling these disputes. But the World Trade Organisation's rulings aren't exactly enforceable. Countries really need to cooperate with the WTO. And in the United States, they've given OPEC countries immunity from American antitrust laws. So it is what it is.

Sascha: [00:06:17] It is what it is. So that's OPEC plus. And that brings us to the news of the week that they have agreed to cut global production by 2 million barrels a day.

Alec: [00:06:27] Yeah. And for context around this decision, oil prices have been falling over the past few months, so you probably noticed it when you're filling up your car. Oil prices really peaked in March this year, a month or so after Russia invaded Ukraine. The West had stopped buying Russian oil, meaning that supply was tight. Traders thought the price was going to go even higher, but it has been falling. The two main oil prices that the world looks at, West Texas Intermediate and Brent Crude have both fallen about one third since March. If we look at Brent in March, it was almost $130 a barrel, and in September it fell to about mid $80 a barrel. So a pretty big fall, OPEC. They make their money from selling oil. They obviously wanted a higher oil price and so they've been cutting production. So in September, they agreed to cut production 100,000 barrels a day, which sounds like a lot would fill up a few Olympic swimming pools, but it's only about 0.1% of global production. And now in early October, they've agreed to cut production by another 2 million barrels a day, which is about 2% of global consumption.

Sascha: [00:07:33] Yeah, 0.1% to 2% is a big jump in percentage terms. Yeah.

Alec: [00:07:38] And it's cumulative as well.

Sascha: [00:07:39] Oh, so has that had an effect on prices?

Alec: [00:07:42] Yeah, it has. Since September. Oil prices have been trending upwards. The Brent price hit about $85 a barrel and now it's back just under $100 a barrel.

Sascha: [00:07:52] So higher petrol prices soon than, I guess, Alec. Well, let's take a break here then. We're going to need the ads to afford those higher petrol prices. And then let's talk about the lay of the land when it comes to the geopolitics of it all, because there's a lot to cover.

ads: [00:08:19] But there are people in Washington and in the White House who right now are looking at the cuts that Opec+ is making. And they are saying that this is an aggressive move by OPEC's. And they're very, very curious to understand why this organisation that they call a cartel is moving against the United States and Europe.

Sascha: [00:08:39] Welcome back to the Dive. The price of oil is one of the most important prices in the global economy. And as much as we don't want to recognise it, the world runs on oil. So much so that Alec has challenged me. He thinks that he could find a way that the price of anything. Absolutely anything I can think of is pushed higher because of higher oil prices. I mean, let's start with something basic like bread.

Alec: [00:09:05] Farms are just run on oil.

Sascha: [00:09:07] You know my face now, it's not great for a podcast medium, but I'm shocked.

Alec: [00:09:12] You need oil to run farm machinery. You need fuel to get whatever your produce is to market or, you know, to a supermarket. But also fertiliser. The price of fertiliser is affected by the oil price because people will substitute oil for natural gas. And natural gas is a key input in fertiliser.

Sascha: [00:09:33] And case.

Alec: [00:09:33] Three ways.

Sascha: [00:09:34] Very good. Well, what about something that you might not know so much about? But what about my lipstick.

Alec: [00:09:40] Without knowing much about the production process of lipstick? But there's plenty of plastic in lipstick, wrapping and stuff like that. Higher oil price plastic is made from oil. So that's one way. Also, the way that your lipstick gets to you, whether you buy it online or you buy it in the shop again. Transport runs on fuel that's affected by the oil price.

Sasha: [00:09:59] Okay, well, I've got one more to try to stop you. What about my Adobe Audition subscription? Which I used to edit the show?

Alec: [00:10:07] Yeah. So software, that is one that you wouldn't think so much about. But higher oil prices push up the price of everything when inflation is high. Employees ask for a pay rise. So there's plenty of highly paid software workers at Adobe that want a cost of living increase. But also, software companies use a lot of electricity, the massive tanks of servers that they're using to feed you your Internet enabled software subscription doesn't come for free. And higher oil prices push up energy prices because energy sources are substitutable.

Sascha: [00:10:41] Well, I was going to believe you anyway, Alex, but I really enjoyed the way that you did the spider web, that connecting them all together. I believe you. Oil prices push up everything.

Alec: [00:10:51] But I think that is the point. Like that is why this matters geopolitically. Because oil, as much as we may not want to admit it or recognise that oil is the most important commodity in the world.

Sascha: [00:11:02] And such an important commodity is bound to have effects on political and national security implications. That's it. And in this case, OPEC+ decision is seen as support for Russia and a slap in the face for America.

Alec: [00:11:15] Slap in the face a mode of language. But we're not the ones coining that we've been saying in reporting. And this is because the West has been sanctioning Russia since the invasion of Ukraine. And Russia continues to be able to sell oil, mainly because China and India keep buying it. The falling oil price is bad for Russia, though. 40% of Russia's government budget is from the sale of fossil fuels and they're getting less money because of this falling oil price. At the time when Putin needs more to fund his war effort. So cutting supply of oil, pushing the price back up, that's good for Putin. But turning to the states, they're also a massive oil producer. In fact, in 2018, they became the world's largest oil producer, bigger than Saudi Arabia, bigger than Russia. But their priority right now is getting inflation under control and higher oil prices don't help. That, as we just examined the Biden administration has been so focused on getting more oil into the market that this is the slap in the face that everyone is talking about. In July, Biden visited Saudi Arabia to meet with the Saudi crown prince, Mohammed bin Salman, to ask him to increase oil production. And in recent weeks leading up to this OPEC+ decision, American diplomats have been going back and forth from Riyadh, Saudi Arabia's capital, trying to convince the Saudis not to cut production, but they were unsuccessful.

Sascha: [00:12:38] It hasn't happened. So OPEC+ decision helps Russia and other oil exporting nations and hurts the United States and nations that rely on importing oil. But should we be surprised Russia is, after all, a member of Opec+?

Alec: [00:12:53] Yeah, we shouldn't be surprised. All of these oil producing nations want higher oil prices for their own reasons, for their own government budgets. You know, Saudi Arabia, the de facto head of OPEC plus are trying to build that new city, Neom. That is basically a long straight line in the middle of.

Sascha: [00:13:10] Does it? Yeah, I loved that episode we did on that because it's literally like The Jetsons meets the desert and they're just trying to create this absolute pie in the sky dream. I think it's.

Alec: [00:13:21] Unbelievable. And I have been peppered with sponsored Twitter ads since we did that episode. But, you know, all of these oil producing nations want a higher oil price, so we shouldn't be surprised. This one OPEC decision that points to a lack of U.S. energy independence, if you believe the you know, the Republican line about that, inflation increases gas prices at the pump. Our relationship with Saudi Arabia, because now people are wondering, what did we get from the visit earlier this year from President Biden to Saudi Arabia and the war in Ukraine? Because this obviously favours Russia.

Sascha: [00:13:57] And there's one more element to this as well. OPEC will, worried about a new U.S. policy, the price cap that they were trying to impose on Russian oil.

Alec: [00:14:06] Yeah, the price cap. Now, it was basically a way to bring China and India along with Russian sanctions, rather than trying to convince countries to stop buying Russian oil, which hadn't worked, the U.S. wanted to convince the world to band together and only agree to pay a price up to the price cap. So let's say the price cap was set at $50 a barrel, even if the oil price is $90. If the whole world refused to pay more than $50 a barrel for Russian oil, then Russia is forced to sell it at $50 a barrel. This keeps China and India happy. They can keep buying oil.

Sascha: [00:14:40] Still access it.

Alec: [00:14:41] Yeah, it keeps the oil in the market. So the supply is there globally, but it keeps money out of Putin's war chest. So that sounds good so far. Yeah, but it absolutely freaked OPEC out because if OPEC is a cartel of oil sellers, this price cap is essentially a cartel of oil buyers.

Sascha: [00:15:01] Yeah, all.

Alec: [00:15:02] Of the buyers of oil getting together and agreeing on the price. And as analysts from Jp morgan explained, OPEC+ decision to cut output serves the notice that the Producers Alliance will oppose any attempts by a buyers cartel to lower the oil price. And many of the other members of OPEC are currently or have previously been subject to American sanctions Venezuela, Iran, Iraq, Libya. And they were worried that if the US successfully implemented a price cap against Russia in the future, they may implement it against these other members of OPEC as well.

Sascha: [00:15:38] Alec, there's just so much geopolitics in oil. So what next? What's going to happen now?

Alec: [00:15:43] Well, for us, expect higher petrol prices. And when petrol prices get higher, American shale oil producers get their drills going and stop fracking. But reports are there isn't a lot of shale oil on the sidelines. So we're probably not going to see that supply grow and bring the price down. The US may release oil from their strategic reserve, which is basically their break in case of emergency stockpile. But that won't have a long term effect on prices. So we should expect higher petrol prices and those prices to flow through the economy. How high? That's the question that everyone's asking at the moment. But one other thing we should expect. We should expect an angry response from America. A White House official has come out this week and said the President Biden will, quote, re-evaluate America's relationship with Saudi Arabia. And reports are that he may be considering cutting arms sales or ending immunity for OPEC countries from American antitrust laws. For decades, America and Saudi Arabia have had an energy for security relationship. Saudi Arabia provides the oil, America provides the weapons. And despite all of their disagreements and cultural differences, the two countries have relied on each other. And we may well be witnessing the first steps of that relationship breaking down. Or more likely, after a few months of strong words, Biden and Mohammed bin Salman will sit down and sort it out.

Sascha: [00:17:12] It sounds like this is going to be the big story of the year.

Alec: [00:17:16] There's been some big stories. Obviously, Russia and Ukraine probably takes the cake. European energy crisis that flow on from that. But yeah this this looks like it may have a podium finish.

Sascha: [00:17:26] Yeah.

Alec: [00:17:26] Or email fizzle out.

Sascha: [00:17:28] Well wait and see and stay tuned to the dive because we will cover it if there is an update. If you enjoyed this episode, then please tell a friend about it. It really is just the best way for our podcast to grow and if you've joined us for the first time, welcome. Go check out our back catalogue. Go listen to the episode on Neom that crazy city in the middle of the desert. You'll get up to speed with what they're building there. Alongside this episode, we released a short headlines companion. Today we travelled to France, Saudi Arabia and we had some good news out of the U.K. So you can find that right there in your podcast feed. Remember, you can follow us on Instagram at the Dived Up Business News. You can contact us by email the dive at Equity Mates dot com and you can subscribe we're. You're listening right now, so you never miss an episode. Thanks so much for joining me today, Alex.

Alec: [00:18:14] Thanks, Sasha.

Sascha: [00:18:15] Until next time.