Another OPEC decision, another bout of hysteria. As ever, the combination of a loud voice and low knowledge of economics means that the Americans suffering aneurisms about alleged Saudi treachery are misreading the situation. The need for OPEC to modernize its ossified public relations strategy grows ever more acute.
Oil prices have been rising steadily since the $20 lows realized during the pandemic. The primary driver has been a recovery of global demand coupled with low growth of supply. This latter phenomenon was caused by the collapse in oil investments that followed the oil price crash of 2014-2016. Without continual investment, the productivity of oil fields shrinks organically, and applies a steady upward pressure on prices.
Given that the investment cycle for oil is around five years, it is only today that the world is reaping what it sowed during the second half of the 2010s. Of course, it is natural for humans to fixate on proximate causes for rising oil prices, such as the Ukraine conflict, or OPEC’s interventions, but politicians and analysts really ought to know better.
Despite rising to $120/barrel during the Ukraine conflict, oil prices have declined steadily since June due to justified fears of a global recession. Consumer price inflation has gotten out of control in Western economies, necessitating sharp rises in interest rates, with a slowdown in economic activity being imminent. That’s why prior to OPEC’s most recent output cut, the black gold’s price had fallen to the levels seen prior to the Ukraine conflict, and was clearly trending downward.
OPEC correctly reasoned that if they don’t intervene to arrest the decline, a fresh collapse in oil investments will materialize, leading to new oil price spikes a few years from now. That would be bad news for everyone, most notably oil importers.
Saudi Arabia is certainly a highly influential OPEC player, but the output cut was not a decision to stand with Russia over the US. After all, despite all its differences with Iran, Saudi Arabia regularly cooperates with its neighbor in OPEC. The output cut reflected a coincidence of the long-term interests of both oil exporters and importers, including the US and the EU.
The key modifier is “long-term”, and it also explains why so many American politicians dressed in blue are disgusted by the call. Many Democrats are confusing their short-term electoral interests with the long-term interests of the American population – a standard neurosis for incumbent politicians.
We know this because they demonstrated their propensity for economic myopia when managing consumer price inflation in the US. When many economists were calling for the Federal Reserve to raise rates during the latter half of 2021 to check inflation, Democrats exerted political pressure to delay the rise, because they wanted the economy to boom in time for the November 2022 mid-term elections.
They gravely miscalculated, and now they have had to take a double dose of interest rate medicine to make up for their earlier vacillation.
Poor knowledge of the economics of oil markets, a misreading of the long-term interests of the US economy, and the willful fixation on short-term interests at the expense of long-term ones together account for the baseless anger among American elites. This is reflected in the fact that the politicians and media personalities with the demonstrably weakest knowledge of economics – be they Bernie Sanders or think tank scholars who specialize in security and defense – are the ones complaining most vociferously.
OPEC has contributed to this situation by having a chronically weak public relations strategy. Their website looks like a relic from 2005, and their press releases are completely bland. The member states have invested little in grassroots campaigning, possibly due to a previous indifference to looking like an economic pariah. Both OPEC and the world economy might pay a big price if the oil club fails to improve its media image.
Other contributing factors include the neo-colonial mindset that is widespread in Western foreign policy circles. Middle Eastern countries are supposed to do as they’re told and use whatever minimal levers, they have at their disposal to ingratiate their colonial overlords. But on this occasion, the interests are aligned, and the discrepancy is more about economic literacy. Rather than lecturing oil markets about right and wrong, it’s time for the US to learn to listen, as it might just learn something useful.