With US and OPEC interests merging what should Asia-Pacific do?

Oil prices have had their biggest fall in two decades, storage capacity is running out and demand has been emaciated by COVID-19

20 April 2020, Roc Xunpeng Shi, UTS

Even after OPEC+ approved its biggest-ever oil production cut with fellow oil-producing nations – including the United States – on April 12, oil prices further declined by 20 percent in a week. US West Texas Intermediate (WTI) fell as much as 13 percent to $17.31 per barrel on Friday (April 17), charging toward a new 18-year low.

The continuous decline of oil prices comes amid another unsuccessful attempt to control oil markets by OPEC (Organization of Petroleum Exporting Countries) in the past two months.

With the ‘fracking revolution’, renewable energy developments and climate change initiatives, OPEC faces the most severe threats to its control of oil markets in its 60 year history. OPEC responded to this change by coordinating production-cut deals with Russia and other members of the oil-producing alliance, the so-called ‘OPEC+’.

This alliance, however, has not worked particularly well in the past two months. On March 6, Russia rejected OPEC’s plan to cut an additional 1.5 million barrels of daily output. This failure triggered Saudi’s bold movement to slash the oil price and started a price war.

Saudi Arabia and Russia face-off

Some analysts believe the Saudi intention is to punish Russia for abandoning the OPEC+ alliance. Others argue that sacrificing OPEC+ is a Russian tactic to damage American shale producers, which require higher oil prices than conventional oil producers to stay profitable.

With advances in drilling techniques over the past decade, the US has re-emerged as the world’s number one oil producer. Being independent from OPEC, the US has limited OPEC’s market and pricing power by offsetting OPEC’s output cuts.

Nevertheless, the American shale sector – the new ‘swing producer’ in oil markets – has indeed experienced very sharp pain. Whiting Petroleum has become the first major shale bankruptcy due to the drop in oil prices in March.

Oil cartel now serves US interests

Historically, the US railed against the oil cartel as a threat to the American economy. However, with a dramatic increase in domestic oil production, US policymakers face an increasing need to avoid low oil prices, an interest similar to OPEC. Since American shale producers have accumulated roughly $86 billion of debt due in the next four years, low prices raise the risk of bankruptcies, which would create significant disturbances to US job markets.

This challenge explains the Trump administration’s intent to intervene in the Saudi-Russian oil-price war. On April 12, President Donald Trump tweeted that his role in reaching the ‘big Oil Deal with OPEC Plus’ would ‘save hundreds of thousands of energy jobs in the United States’.

In addition to the steering of this historic deal, the US has also helped save the agreement by taking on the major part of Mexico’s share of the production cut. The OPEC+ meeting on April 9 unexpectedly failed to reach a firm deal because Mexico refused to participate in the cut.

US and OPEC ambitions align

Although the recent OPEC+ deal failed to boost oil prices, the US’ coordination with the activities of OPEC+ is a significant milestone. Although the US has so far not signed up to join OPEC+, the joining of hands between the US and OPEC+ signals an ideology shift because the United States is historically the world’s most vocal proponent of the free market.

Since OPEC aims to coordinate and unify petroleum policies among member countries, its open and regular price-fixing is not compatible with antitrust laws that underpin the free market. However, antitrust laws do not apply to the foreign governments who form OPEC.

Coordination between the US and OPEC is not reassuring for global petroleum consumers. At the end of his tweet on April 12, President Trump praised the OPEC+ plus deal as a ‘great deal for all!’ This is simply not true. It will save US jobs, but billions in costs will be borne by petroleum consumers in the US and elsewhere.

Oil-consuming countries should work together to restrain the behaviour of OPEC+. Since the International Energy Agency (IEA) – the existing oil consumer group – has failed to reflect the interests of major emerging economies such as China and India, the G20 could adopt a new leadership role in global energy governance to restrain the behaviours of OPEC and its alliance.

The Asia-Pacific members of the G20 – that is, Australia, China, India, Japan, and Korea – ought to have a collective voice on the international markets as they face the same oil price formula set by Saudi Arabia.

Roc Xunpeng Shi is Principal Research Fellow at Australian-China Relations Institute, University of Technology Sydney.