A Pact That Cannot Stop The Flow Of Cheap Oil

  • Date: 18/02/16
  • Editorial, Financial Times

Saudi-Russia deal does not take account of game-changing shale revolution

The conditional agreement to hold oil production steady announced by Saudi Arabia and Russia on Tuesday was a triumph of the art of diplomacy, delivering the maximum rhetorical impact for the minimum genuine commitment. Its careful construction tells you everything you need to know about today’s oil market.

Co-ordinating oil producers to manipulate prices has never been easy, and has been effective only for limited periods, most spectacularly in the 1970s. Since the emergence of US shale oil in the past seven years, it has become just about impossible.

The semi-tough position agreed by Saudi Arabia and Russia may not amount to very much. Oil prices fell sharply in the aftermath of the announcement, although they later rebounded. But in the circumstances, it was the best both countries could have done.

The deal will not take a single barrel of oil off the market to ease the glut that has driven crude prices down about 70 per cent since the summer of 2014. Even the agreement not to increase output depends on other leading producers signing up. On Wednesday, Iran, which plans to increase its production, did not commit to joining the freeze.

Even such a weak agreement — the first between a member and a non-member of Opec for 15 years — is significant as a sign of nervousness among the world’s two largest oil producers. But the fact that Saudi Arabia is not already cutting its output, in spite of mounting signs of financial strain, shows that while its strategy might be painful, it is still rational. […]

The US shale revolution heralds a structural transformation in the productivity of the oil industry, and like any other such advance, it is a net benefit to the world economy. This is sometimes under-appreciated, because the gains are widely spread among all consumers while the pain is concentrated on a smaller number of producers. Overall, however, cheap oil is a stimulus to growth.

We are in a world where co-operation between Saudi Arabia and Russia elicits a yawn and not a shudder. Across most of the rest of the globe, that is surely a cause for celebration.


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