The Impact of the Agreement on Oil Production Cuts

April 15, 2020
About the author: Mr. Yu Hongyuan, Fellow of the Taihe Institute, Professor and Director of Institute for Comparative Politics and Public Policy at the Shanghai Institutes for International Studies.

(Credit: The New York Times)
Affected by the global spread of the COVID-19 pandemic, international oil prices have repeatedly set new lows. On March 18, the price of United States West Texas Intermediate crude oil (WTI) futures fell as low as $19 per barrel. After a period of arduous negotiations and price competition, Saudi Arabia, Russia, and other oil-producing countries finally reached an agreement to reduce production on April 12. According to the agreement, the first phase is planned to reduce output by 9.7 million barrels per day starting from May 1 this year, with all member countries cutting production by 23 percent. Among these, Saudi Arabia and Russia will reduce output by 2.5 million barrels per day respectively and Iraq by more than 1 million barrels per day. However, considering the more than 20 million barrels cuts per day in demand caused by the pandemic, the huge gap between supply and demand, and the agreement’s inability to fully meet market expectations, the market has expressed disappointment, and believes that ultra-low oil prices will persist for a period of time.

First, low oil prices will not only catalyze geopolitical and economic conflicts, but also curb the ability of major producing countries to put their cards on the table. Moreover, low oil prices are not in the general interests of global producing countries and do not have a long-term sustainable foundation. However, the agreement reflects the common interests of major oil producers who hope the U.S. to get involved so as to reach an agreement to reduce production.

Secondly, the agreement reflects the power of the U.S. to mediate energy diplomacy. The Trump administration has used tactics involving diplomacy, politics, and finance to shape the U.S.’s global energy dominance. The current three-way competition between the U.S., Russia and Saudi Arabia has been enhanced, and given the heavy losses suffered by the U.S. under the impact of both the pandemic and low oil prices, it will not permit Russia and Saudi Arabia to continue their feud. However, oil financialization and the petrodollar remain long-term advantages for the U.S., and the Republicans in Congress are helping Trump by offering military support and protection to Saudi Arabia in exchange for strengthening the U.S.’s position in the country. The U.S. also pressurized Mexico into passing the agreement through its production cuts and other compromises. The Trump administration’s initial success in its energy mediation and the oil production cuts are intended to promote the adherence of other major producing countries to the OPEC+ Vienna summit agreement on oil production cuts in order to bring oil prices into balance.
Third, the world after the agreement on oil production cuts will enter into an era of low oil prices in the long term. As the agreement is finalized and the pandemic gradually brought under control, and international oil prices return to rationality after the negotiations, oil prices are expected to rebound from the current range of $20-$30 per barrel to $40-$50, but with little possibility of returning to over $60 per barrel, given flattened oil supply over the long term, coupled with the thriving development of alternative energies. In particular, it is worth observing whether the agreement on oil production cuts can be fully implemented, and major producing countries faced by ultra-low oil prices will find it hard to conduct collective actions effectively.

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