Crude Economics
What Good Would an Oil Freeze Be?

Don’t look now, but oil prices just crept above $50 per barrel, briefly hitting a two-month high on rumbles that a petrostate production freeze deal might be in the offing. The FT reports:

Plans to try and accelerate the long process of bringing supply and demand back into balance have been boosted by Opec kingpin Saudi Arabia and Russia — the biggest exporter outside the cartel — saying they will discuss “possible actions” to stabilise the market when oil ministers convene on the sidelines of a conference in Algeria next month.

If this sounds familiar, that’s because we’ve seen this played out before, not four months ago when oil prices climbed after weeks of speculation that this same group of oil producers would hammer out an agreement to place an upper limit on their production. But this “freeze” never materialized thanks to Saudi intransigence at a meeting in Doha, and oil prices deflated after it became clear that delegates were unable to find enough common ground to sign off on any freeze deal.

This time, though, some analysts think there’s a better chance of this whole thing actually happening. Iran is closer to its pre-sanctions oil numbers, and therefore might be more amenable to limits being placed upon it. And if Tehran is on board, Riyadh might concede to a freeze as well. The question then becomes, would this amount to anything significant? Not likely, as Bloomberg reports:

Now that major producers including Iran are pumping at or close to capacity, they have little to lose by agreeing to a cap, Chakib Khelil, former OPEC president and Algerian energy minister, said in a Bloomberg television interview Aug. 17. […]

“A freeze at 34 million barrels a day is not the same as one at 33 million barrels a day,” said David Hufton, chief executive officer of PVM Group in London, referring to the broker’s own estimate for total OPEC output. “It pushes the re-balancing process back at least a year.”

The whole point of coordinating production is to help ease the oversupply that precipitated the collapse in crude prices over the past two years, but freezing output at already-high levels by definition won’t reduce supply. The best that could be hoped for would be a significant increase in demand that, with supply being kept relatively level, might induce a rebound. But where is that uptick in demand going to come from? Europe’s economies can hardly be described as dynamic these days, and China—the go-to buyer of all kinds of commodities for years—has seen its extraordinary growth rates waver recently.

A freeze may be more likely this time around, but it’s also a lot less likely to solve any of the problems petrostates face in today’s bearish market.

Features Icon
show comments
© The American Interest LLC 2005-2017 About Us Masthead Submissions Advertise Customer Service