Oil prices

How Cartels and Political Uncertainty Cause Rising Oil and Gas Prices

Rising U.S. oil production will moderate future price increases.



The price of West Texas Intermediate (WTI) crude oil rose from just over $30 per barrel in February 2015 to fluctuate around $50 per barrel over the next few years. Since last September the price has increased from $50 to around $70 per barrel. Politics is at the heart of the recent increase.

First, 18 months ago the Organization of Petroleum Exporting Countries (OPEC) orchestrated a production cutback among both its members and major non-OPEC producers seeking to boost oil prices. Most cartel member governments are eager to boost oil prices since their economies are highly dependent on oil revenues. For example, oil production accounts for more than 50 percent of the GDP of Saudi Arabia and Russia.

The initial cutback agreement was to withhold about 1.7 million barrels of daily oil production. In March the cartel actually managed to withhold about 2.4 million barrels per day. Part of the "success" of these cutbacks is the result of economic and political instability in many oil producing countries. As the result of the ongoing economic horror of Venezuela's economy under the Bolivarian leadership of Nicolas Maduro, oil production in that country has fallen from 2.4 million to nearly 1.4 million barrels per day. Oil production in post-Arab Spring Libya is only 400,000 barrels per day, down from 1.6 million before the fall of Qaddafi. South Sudan oil production has fallen from 500,000 to 130,000 barrels per day.

In addition, President Trump's withdrawal from the Iran nuclear deal has heightened the political uncertainty about the trajectory of that country's oil production. Iran is hoping that foreign investment will help the country boost its daily oil production from 3.8 million to 5.5 million barrels.

Even as the short term global supply outlook has become somewhat unsettled, world daily oil consumption is projected this year to increase from 97 million to 98.5 million barrels. Uncertain supply meeting increasing demand is a surefire recipe for rising prices, at least in the short run.

Rising prices, however, have another effect: They call forth efforts to find more supplies. In this case, U.S. drillers are already mobilizing to supply the markets with more crude. The number of oil drilling rigs being deployed is rising. The U.S. Energy Information Administration's latest short term energy outlook report estimates that U.S. crude oil production will rise from a 2018 average of 10.7 million barrels to 11.9 million barrels per day in 2019. The agency forecasts U.S. crude oil production will reach more than 12 million barrels per day by the end of 2019. This domestic production increase will have a significant moderating influence on future oil prices. Consequently, the agency forecasts that WTI prices will fall back to an average of around $60 per barrel in 2019.

If the political prospects improve in countries like Venezuela, Libya, South Sudan, and Iran, prices will fall even lower.