Surprising outcomes of higher oil prices
Two years ago, in February 2016, the price of oil was in the low $30 per barrel range. Predictions of doom and gloom abounded. At that time, the IEA warned that, “Unless something changes, the oil market could drown in over-supply." As Forbes writes in an article "3 Surprising Outcomes Of Higher Oil Prices", one third of all oil companies were at risk of bankruptcy. Economic indicators from China showed the slowest growth in 25 years, and despite multiple calls for OPEC to cut production, the organization did nothing. Fast forward two years and oil has doubled in price. It is very likely that the price of WTI will finish February somewhere above $60 per barrel.
Forbes wrote about three surprising outcomes of the two year gains in oil prices.
1. Shale oil investors are still waiting to see profits. The shale oil industry has undergone a period of consolidation. Companies that did not go bankrupt have rid themselves of much waste. In general, shale companies in the U.S. have become more efficient and employed new drilling practices at lower costs. Nevertheless, all but the very largest have not been able to show a decent return on investment. This continues, despite the higher oil prices and record production in the United States.
2. In 2016, pundits and analysts rushed to declare OPEC a dead organization. OPEC was seen as irrelevant, incapable of taking action and lacking the combined will to cut production and raise the price of oil. Many observers in 2016 criticized former Saudi oil minister Ali al Naimi, who refused to entertain production cuts in 2014 and 2015 without serious commitments from every OPEC and some non-OPEC countries. Now that the price of oil has doubled, OPEC has suddenly become relevant again to industry and financial firms. In late 2016, Saudi oil minister Khalid al Falih negotiated a production cut agreement with OPEC and key non-OPEC producers like Russia and Kazakhstan. This agreement seems to have played an important role in drawing down the excess oil on the market and pushing up prices. Falih has even managed to wrangle Russia into compliance, and now the group may be working toward establishing a more permanent OPEC-Non-OPEC “super-group.” Suddenly, the strategy of Naimi and Falih strategy doesn’t seem so misguided anymore.
3. Venezuela and Iran have not improved their economic situations and have, in fact, become worse. Venezuela’s economy was the first to feel the negative impact of lower oil prices. The effects were particularly acute since Venezuela’s oil is very costly to produce and its state-run economy is highly dependent on oil revenue. Despite the fact that oil prices are now double what they were two years ago, Venezuela’s economy continues to sink rather than show even modest signs of recovery. Venezuela is so starved of cash that it cannot even afford to produce enough oil to meet its OPEC quota. There are now reports that oil workers in Venezuela are unable to perform their jobs due to acute hunger.
Iran’s economy has also failed to recover despite higher prices and sanctions relief. Iran struggles to find international partners to help improve its energy infrastructure. International oil and gas companies are not operating in Iran because the government won’t offer contracts, insists of unreasonable negotiating terms and scares away foreigners with capricious arrests and detentions. For both Iran and Venezuela, the government's failures have meant that even with today’s higher oil prices, their economies are not recovering.