Can A Buyers Cartel Challenge OPEC?

  Italy's former PM Mario Draghi suggested it first, then U.S. Treasury Secretary Janet Yellen took up the idea and built on it. What if, the idea was, large oil importers united against oil producers?

Many from the analytical field were skeptical. With oil demand where it is, the global oil market was effectively a sellers' market, which meant producers had a greater say in where prices go than buyers.

Limitations to large producers' spare capacity contributed to this greater say, putting oil buyers in a risky position. Some say, however, that a buyers' cartel could work and that it did work last year, cushioning the blow that high oil prices would have served up to many large consumer countries.

Barron's Avi Salzman, for instance, argued in a recent piece that the Biden administration's massive180-million-barrel release from the strategic petroleum reserve of the United States had been just such a successful move, especially since it was combined with strategic oil reserve releases from other countries, mostly in Europe.

Oil prices indeed fell last year, and the fall overlapped with the SPR release to an extent, prompting perceptions of the move being a success. Skeptics, however, pointed out that once sold, these 180 million barrels would need to be restored to the strategic reserve, so it continues to deserve the name.

Related: U.S. Oil and Gas Is In No Hurry To Grow

Countless calls on the U.S. oil industry to boost production, eventually devolving into threats, did not result in any actual significant production gains, so whether the reserve release move was, in fact, a success remains an unanswered question.

Moving on, the very idea of buyers telling sellers what price to set for their commodity shriveled and died, replaced by a much trendier one: cut off imports of Russian oil to punish Putin for the Ukraine invasion and reduce his oil revenues.

This is the idea that made progress, first in G7 and then in the EU, which had come up with a much harsher punishment that would have punished its own citizens, too: a full oil and fuel embargo. 

The G7 price cap, on the other hand, aimed at keeping Russian oil flowing into global markets but reducing the money Russia could receive for it. This would seem like an admission enough that the world-and especially the West-cannot really quit Russian oil in a matter of months.

It would also suggest that buyers could never take the upper hand over sellers when sellers are organized and prepared to shift production in a way that would allow them to retain control over prices. Because now that the EU has stopped buying Russian seaborne crude oil, it would have to replace it with Middle Eastern oil from countries that Russia is a partner with in OPEC+.

Another thing big oil importers in Europe did to cushion the blow of high oil prices was fuel subsidies. Across the EU, national governments subsidized the gasoline and diesel drivers put in their tanks to relieve an already significant financial blow coming from the gas market. They also instituted a windfall tax on oil and gas companies, much to their chagrin, to get the money for the subsidies.

According to Barron's Salzman, this intervention on the part of oil-consuming countries showed that there was an alternative to pleading with OPEC to increase supply. In fact, this alternative has always been there, as has the alternative of boosting your own supply, which is what the U.S. did after the 1970s Arab oil embargo and its fallout, which caused one of the graved economic crises in U.S. history.

Unfortunately, as we've seen from the White House, the "plead with OPEC" option has gone nowhere. It has simply become one of two options, the other one being "plead with local producers." Neither approach has worked, and there could be one possible reason why it hasn't worked or, rather more accurately, two: China and India.

The world's biggest importers of crude oil by far, and the biggest clients of all the leading OPEC+ members, China and India, would have been instrumental in any buyers' cartel initiative. Only they refused to take part. Why would they, when they were getting all the discounted Russian crude they could take in? 

At the same time, Saudi Arabia is cutting its official selling price for crude for Asian buyers and is expected to cut it again to keep its market share in the vast Asian market, where the demand outlook remains foggy because of Covid developments in China.

When the U.S. Secretary of State lobbied for support for the price cap idea, she went to Asia. The media covered her visits to Japan and South Korea and their commitments to the price cap (Japan eventually got an exemption), but the actual targets were China and India. That mission failed, and the very idea of an oil buyers' cartel failed, too, because of one simple fact.

It all comes down to who needs what more. For now, it seems that oil buyers in the U.S. and Europe, especially the latter, need OPEC oil more than OPEC needs to sell it to these specific buyers. In the U.S., OPEC oil is needed not so much as a literal import but also as a commodity that is being produced in order to put a cap on prices and, consequently, on fuel prices in the U.S. itself. In such a situation, the balance of powers is really not distributed evenly between buyers and sellers.

By Irina Slav for Oilprice.com

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