There are a lot of problems with Russia and Saudi Arabia’s plan to freeze oil output at current levels: Iran isn’t on board (and in fact intends to increase its own production by 1 million barrels per day this year now that Western sanctions are being lifted), U.S. shale producers are waiting in the wings to pounce on any price rebound by unleashing their “fracklog,” not to mention the fact that simply capping production won’t quickly erase the glut that led to the price collapse in the first place.
But there’s a logistical hurdle for this new petrostate strategy, too. As Bloomberg reports, it’s going to be difficult to monitor production levels to ensure producers are abiding by the agreement:
To [measure global oil production], the industry counts on a small group of little-known companies whose main job is to count the number of tankers leaving ports, at best using data gathered from satellites, at worst using simple binoculars. They then guess how much crude is being carried by measuring the depth of the vessels in the water. […]
The matter becomes even more complex for oil moved within pipelines. Russia, for instance, exports roughly 30 percent of its crude via pipeline, according to official data. That flow is most often measured by independent groups using infra-red photography, which provides only a rough approximation of output.
The Organization of Petroleum Exporting Countries traditionally has published a measure of production based on what the group calls “secondary sources,” in effect consultants who calculate flows from a variety of sources, including tanker tracking data. The cartel also publishes production figures based on what OPEC countries release publicly. At times, these figures can be very different. For instance, the United Arab Emirates has listed data in the past showing output that was as much as 10 percent higher than the figures produced by OPEC.
Any monitoring discrepancies will only exacerbate an already high level of mistrust between these uneasy oil producing partners. We got to $35 oil because OPEC—led by the Saudis—was unwilling to cede any of its market share, choosing instead to endure a bearish market. This proposed production freeze is a tentative step towards pushing prices back up, but producers have an obvious incentive to sign on to this plan without actually cutting back. The fact that monitoring is so ureliable will make that sort of free riding easier and could undermine this sudden showing of solidarity.