PHOTO: BLOOMBERG NEWS
Written by Nikolay Nikolaev; Originally appeared at A-specto, tranlsated by Borislav exclusively for SouthFront
OPEC’s decision to cut production and the signals coming from the new administration of President Trump speak about a gradual increase in the price of “black gold”
The past decade will be remembered as a period of great contrast in the price of oil in international markets. From more than 145 dollars for the WTI kind in July 2008, to less than $ 30 at the beginning of this year, the value of oil marked a constant decline. The reasons are known – political pressure on one of the world’s leading manufacturers Russia, attempts to strengthen the dollar and rivalries within the United States. Today, the picture is dramatically different. One by one the factors which knocked down the price of oil, are beginning to reverse their direction.
The decline in prices coincided completely with the events in Crimea. Behind the oil prices was the strategy of sanctions as a lever of pressure on Russia’s policy. The United States, backed by its Western allies had an impact on Saudi Arabia and the Sunni monarchies in the region who gave into such a policy, hoping to push away Moscow’s energy markets. For this purpose the rich oil countries literally flooded the world with cheap oil. As a result of the oversupply prices sharply fell. More than two years after the start of the offensive however, the implications for Saudi Arabia and other producers are adamant – the strategy is a failure. As a results of lowered oil prices, oil monarchies are losing billions of dollars and are pushed away from their previous market positions. A good example is Saudi Arabia, which marked a colossal reduction in foreign exchange reserves. This is completely understandable. Riyadh’s budget deficit for 2015 and 2016 fluctuated in the range of 20%, and even the International Monetary Fund warned that the country may be at risk of bankruptcy in the coming years. In addition, Russia was not pushed away from any oil market and even in 2016 it turned into the largest oil exporter in the world. All this forced the countries of the Gulf to change plans.
Under the leadership of Russian energy diplomacy, two key agreements were signed in recent days that will push up the price of “black gold”. At a meeting in Algeria, the OPEC countries have agreed for the first time in more than a decade to cut oil production by 1.2 mln. barrels per day to levels of 32.5 million. Saudi Arabia will pay the largest toll from 14 OPEC countries, as it has to reduce its production by 448,000 barrels a day. Something unprecedented happened. The deal was joined by 11 oil producing countries, which are not members of OPEC. At the negotiations in Vienna, Russia, Kazakhstan, Azerbaijan and other key market players agreed to reduce production by a little more than half a million barrels a day. This means that with few exceptions, the leading exporters of oil globally are officially working for a growth in the value of “black gold”. The agreements comes into force on January 1, 2017 and will have a serious effect on oil prices. According to the Vice President of the Iran-Russia Chamber of Commerce, Gadir Giyaf, Russia’s leading role in the agreement is crucial for reconciliation between the antagonistically minded Saudi Arabia and Iran. “I think that in the future, the oil price will rise to 60-65 dollars” predicted Gadir Giyaf.
Other factors also speak in support of the potential price increase. It seems that the future administration of President Trump, will be an ardent supporter of the policy of a jump in oil prices. The intended policy to return industries from countries like Mexico and China back to the US, the reindustrialisation of the country and a sharp increase in exports are only possible in one scenario – a fall in the value of the dollar. The new administration will face off with the interests of the part of the American elite, grouped around the dollar and the Federal Reserve.
The strong dollar is an integral part of Pax Americana, which puts transnational corporations dominated by the American financial elite at the center of global political and economic life. The idea was born back in the 70s of the last century, under the direction of David Rockefeller’s Trilateral Commission. The aim of controlling dollar printing and instruments such as the neoliberal doctrine of privatization and deregulation, is to ensure the dominance of the dollar in world finance. This in turn promotes the effective acquisition of shares in foreign companies worldwide. This scenario was observed in recent decades. Today however, the future of the American state and the realization of the idea of globalization in its form of domination of transnational corporations are incompatible. Jeffrey Sachs stated just before the elections, that if the Obama policies last another 4-5 years the United States will face a scenario of decay similar to that of the Soviet Union. Donald Trump is well aware of this, as are the people around him.
The problem for the “America great again” idea is that the future US administration has no control over the Federal Reserve and its determinations of the base interest rate. There are not enough mechanisms to lower the value of the dollar. This makes it almost impossible to execute the plans for large industries returning to the US and making the country the world’s leading producer and exporter. However something can still be done. The key to weakening the dollar is precisely in the price of oil.
As is known from the agreement between President Nixon and Saudi King Faisal in 1973, payment for oil is done only for dollars. This means that the value of US currency is secured by oil and the value of oil itself is in inverse proportion. Raising the price of the dollar leads to a decline in the oil and vice versa. If Trump wants to turn the US back into an industrial country, the new US administration will have to rely on the combination of cheap dollar – expensive oil. There is sufficient evidence to suggest that one of Donald Trump’s expected steps will be directed toward a rise in oil prices.
In his speeches so far the billionaire is consistent – from the requested waiver of the signing of the Paris agreement to limit emissions, to a desire for a review of the entire policy toward fossil fuels under President Obama, to support of the energy sector, Donald Trump demonstrates willingness for change. Appointments of senior management positions in the future US administration are indicative.
Trump has a specific goal by choosing for Energy Minister the former governor of Texas, Rick Perry, who is close to the energy lobby – to increase natural gas exports from the United States abroad. From February 2015, Perry is on the board of directors of Energy Transfer Partners. Readers tracking events overseas are aware that the agenda in the media in Washington is dominated by two news – the choice of Trump for President and controversy over the protests against the Dakota Access Pipeline. The main shareholder in the project is precisely Energy Transfer Partners.
The interior ministry in the US will be entrusted to Ryan Zinke – a Senator from Montana and former executive director of the influential consulting company in the field of trade in oil and natural gas. The powerful Agency for Environmental Protection (EPA) will be in the hands of Scott Pruitt – an opponent of the idea of global warming, who the American mass media calls an “ally of the oil lobby.” Among informal advisers to Trump are also billionaires Harold Hamm and Carl Icahn – producers of oil and oil products. The senior member of the giant Southern Co. Michael McKenna is a regular visitor of the transitional cabinet of the new American president. The relationship of the future CIA chief Mike Pompeii and Vice President Mike Pence to the energy empire of the Koch brothers, are well known to the public. In practice, Donald Trump is surrounded mostly by people from the energy sector.
A curious detail is Trump’s promise to open 25 million jobs, generating almost 100 bln. dollars in economic growth each year. Development of the idea was made by Joseph Mason of the Institute for Energy Research. According to Mason, the forecast was made based on a price of $ 100 per barrel of oil at international markets. The analysis is based on the assessment of the International Energy Association. According to an investigation conducted by The Washington Post (who are close to the neocons) the association has not made such a forecast. The publication concluded that other factors are the basis of this assumption. According to the investigation, half a million job opening are posible in the United States only as a result of increased oil prices.
Namely the price of oil is what unites the interests of the United States under the leadership of Trump, with Russia under Vladimir Putin’s leadership. The nomination of ExxonMobil’s Rex Tilerson for the post of US Secretary of State should not be surprising. Think-tanks close to the financial lobby which lost the elections, even speak that the “team of Trump, Putin and ExxonMobil are willing to destroy the planet.” The allegation is frivolous, but we should not forget the fact that the multibillion-dollar deal between ExxonMobil and Rosneft for the development of Arctic and North American oilfields, was blocked by the regime of sanctions. In this light it can not be surprising that energy influential circles in the US, including future Secretary of State Rex Tilerson, are in favor of lifting the sanctions. All these facts speak in favor of the thesis that when the new US administration comes to power, Washington will work with Moscow to increase oil prices. Time will tell whether we are enjoying the last days of cheap fuel.
An increase in oil prices will be beneficial to Russia and Saudi Arabia in the short run, but it will cause the demise of the oil sector in the long run. The technology of clean renewable energy has already reached a tipping point where its becoming economically viable and that trend will only increase. It will only get cheaper whereas oil and gas can only get more expensive. Even worse, once a solar plant or wind farm is finished and the investment paid off they only churn out free energy, for its fuel, wind or solar is free, whereas a fossil fuel plant will always have to pay for fossil fuel to convert it into energy.. You make oil more expensive clean renewable energy will only become more financially attractive. For all the talk of those on the right and the oil sector about liberal flights of fancy, the money will go where it can make the best return. Trump would have to start subsidizing the oil industry to make it even competitive in the long run.
You have the right idea, but the wrong energy sources. Wind, solar, tidal, etc. will never be anymore than incidental producers of energy. The only truly viable replacement for fossil fuel is nuclear. However, we’re all aware of the brainless hysterics that are caused by the least mention of nuclear energy.
Too much Trump. He is not even a president. Where do You get that. A high hat or what.
“Perry is on the board of directors of Energy Transfer Partners” is an open ended issue where the flow of gas and oil resources could even consist of a crossing between Russia and US at the Bering Straight which is narrow and shallow. This could include not only gas and oil but a leg of the “New Silk Road” to Alaska and down to the lower 48 states.
The implications of ending never ending oil wars for corporations leaves an impact of infrastructure investment and reduced foreign war expenditures of trillions to pay off debt as well. Just closing bases around the world and channeling (diverting) military resources into rebuilding the country’s infrastructure and jobs base in the shortest time in our history.
Rex Tillerson has been an oil man for his entire working life. During his 41 years at ExxonMobil Corp he has brought no dishonor to himself or the company. Mr. Tillerson is the Donald Trump of the oil business.
I’m the 4th generation of my family in the oil business, and I work for a major global oil company. What people need to understand is that excessive oil prices do not translate into excessive profits for the oil companies. Excessive oil prices are driven by speculation, and the speculators are the ones who pocket the money, not the oil companies.
Excessive oil prices are an enormous drain on the global economy, but most importantly they really anger the electorate. Excessive oil prices also cause global fluctuations in currency flow as profits from speculation migrate, as hot money, in search of opportunities for further profit. In other words, these excess profits lead to a situation where money is invented out of then air, and central banks really hate that because then they don’t have absolute control of the money supply.
In my career I’ve seen 5 of these boom/bust oil price cycles. Over this time the world economy, governments, and central banks have become more resistant to the effect of energy speculation. The realistic price of crude oil is between $50, and $60 dollars per barrel. Any price above that is driven by speculation.
Good info. Thanks.