Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
"An era can be said to end when its basic illusions are
exhausted"—Arthur Miller, American Playwright.
In the years after World War II until 1970, common beliefs were
that the world's oil resources were plentiful, demand would rise
along with economic activity, and international oil companies could
find and produce enough oil to sustain the global oil order
indefinitely. Then it was the turn of OPEC in an era marked by
resource nationalism, high prices, and the unsettling conviction
that oil was a finite, dwindling, and increasingly scarce resource.
That era ended in 2009 with the start of a rapid and so far
enduring expansion of US output. We are now in an age when oil
resources again appear to be plentiful and an evolving global oil
order in which three oil superpowers—the United States, Russia,
and Saudi Arabia—are supplanting OPEC.
The massive resurgence in US oil output of the past decade has
occurred in this setting, allowing Washing-ton to set the global
oil agenda and reshape the oil order to meet the diversity of its
interests as the world's preeminent economic and military power.
Renewed sanctions of Iran's and Venezuela's oil exports,
presidential jawboning on prices, and tariff and trade spats with
China are impacting or eventu-ally will impact oil markets via
changes in demand and/or supply. This is bringing Russia and Saudi
Arabia, the two other oil superpowers, closer together as they
jointly respond to US actions.
Last July, Russian President Vladimir Putin even went as far as
to suggest during a joint press confer-ence with US President
Donald J. Trump in Helsinki, Finland, that the United States join
it in the "regula-tion of international markets" because neither
country is interested in "plummeting" prices. On a trip to Moscow
in mid-September, US Secretary of Energy Rick Perry said that Saudi
Arabia, the United States, and Russia can increase oil production
in the next 18 months by enough to offset falling supply from Iran
and elsewhere. Indeed, the subsequent increase in oil supply from
the three petroleum superpowers overwhelmed oil markets,
particularly after the United States issued temporary waivers to
major importers of Iranian oil. Oil prices began tumbling and the
Vienna Alliance of OPEC and non-OPEC producing countries had to
quickly agree to jointly reduce supply in 2019. From early October
to late December 2018 crude oil prices fell about 40%.
Still, an inclusive global deal between the big three to carve
up the oil market is hardly likely, given the United States' free
enterprise system and the relatively limited role of government in
this context. However, Trump nonetheless has repeatedly tweeted his
concern about rising oil prices and OPEC behavior even as he
decided to pull out of a nuclear accord with Iran and reimpose oil
and other sanctions on that country, OPEC's third-largest producer.
Trump even called Saudi Arabia's King Salman last year to ask
specifically that the kingdom raise its production. Later in the
year, Trump bluntly reminded the Saudi monarchy of its reliance on
US protection.
Saudi Arabia and Russia: The response
team
As market concern about dwindling inventories and the prospect of a
shortfall in Iranian barrels— in addition to those being lost
in Venezuela—manifested itself in rising prices during spring
2018, Saudi Arabia and Russia responded by raising their output in
advance of a meeting of the Vienna Alliance in Vienna in June. The
meeting duly endorsed the higher output. However, Saudi Arabia's
oil minister Khalid al-Falih said after the meeting that Moscow and
Riyadh had moved in advance because they had "anticipated" the
alliance's decision, removing any doubts that Russia and Saudi
Arabia are effectively the deciders for the 25 OPEC and non-OPEC
countries that form the Vienna Alliance.
Put another way, the United States is now the prime agent of
transformation of the oil order. In turn, Russia and Saudi Arabia
are the leaders of a global response team, whether to sharply
rising US oil output, price and political sensitivities, or oil and
other sanctions and trade events. Indeed, the United States has not
enjoyed such sway in the oil world since its oil output peaked in
1970.
We could call the current period the post-OPEC era, which is not
to suggest that OPEC will not exist; it will, but in the
foreseeable future, with nothing like the power it once had as a
multistate organization. This is already evident in the insistence
by Saudi Arabia since 2014 that it - and in consequence, others in
OPEC - would only cut output to support prices if Russia and other
non-OPEC producers joined in the effort to adjust to sharply rising
production and exports from the United States. This could change if
Russia joins OPEC, but this is not yet in the cards. We call it the
Rule of Three because it reflects the reality that three countries,
above all others, are now calling the shots in the global oil
market. This is almost certain to continue for the next five
years.
The three oil superpowers account for about 40% of the world oil
market—they are the three biggest crude oil producers in the
world, by far (see Figure 1).
Beyond that, their geopolitical profiles mean their actions will
also be guided by their wider interests and priorities (see figure
2).
The production of oil is an important but relatively small part
of the huge US economy. By contrast, oil is vital to the well-being
of Saudi Arabia, a regional power that has for long relied on an
alliance with the United States and, more recently, has cultivated
better relations with Russia. Between the two is Russia, which is
also a military power with wide interests but whose economy is much
more reliant on oil production and exports than that of the United
States.
We can expect US behavior in oil markets to be the most complex
because of the diversity of the country's economic and geopolitical
interests. Saudi Arabia's will be the most focused because of its
singular depend-ence on oil. In any case, the interaction among
these three will establish the rules of the new oil order on the
supply side.
The demand side will be different, with emerging economies -
notably but not exclusively those of China and India - having a say
because they are the engines of growth. Yet demand for oil also
will be affected by, among other things, oil prices and the
economic, fiscal, and monetary policies of the United States. This
balance underlines the interconnected-ness of the global economy
and its sensitivity to the largest players.
Note: This report is a condensed version of the October 2018 IHS
Markit World Oil Watch.
Posted 04 April 2019 by Aaron Brady, Vice President, Energy, IHS Markit and