President Donald Trump again blamed OPEC for high global oil prices on June 13. But macroeconomic factors, as well as the president’s own policies, are more to blame for the rise. Trump doesn’t want to face the reality that his harsh rhetoric and volatile trade policies have heightened uncertainty in global markets, and that can have an upward impact on oil prices.
Global oil prices ranged from $40 to $50 a barrel in 2016, increased to about $50–60 in 2017, and continued upward to $60–75 this year. The common wisdom is that the Russian-Saudi-led deal for Russia and OPEC to cut production in 2017 (which was extended for 2018) is the main cause of the spike. However, the U.S. Energy Information Administration estimates that OPEC crude production only decreased from 32.7 million barrels per day in 2016 to 32.5 million in 2017, a drop of less than 1%. Since U.S. production in 2017 alone increased almost twice as much as this OPEC cut, the Russian-OPEC deal is clearly not the only important cause.
From 2015 onward, global oil demand has increased strongly, and this is likely to continue. Indeed, the U.S. demand for gasoline in 2018 is unusually strong, at the same time that the Trump administration is undermining the planned U.S. vehicle efficiency standard increase from 25 miles per gallon currently to 36 miles per gallon by 2025. To the extent that other major economies worldwide follow America’s lead and fail to meet their energy efficiency commitments made as part of the Paris climate agreement of 2015, we’re likely to see rapid growth in worldwide oil demand for transportation purposes. This, in turn, will sustain upward pressure on global oil prices for years to come.
Certainly Russian-Saudi-OPEC collusion reduced the slack in oil markets, and led to lower stockpiling of crude oil and petroleum products in 2017. As Russia and OPEC held back production, companies used more of their stored crude oil and petroleum products. Lower stock levels, in turn, reduced the slack and flexibility in global and national oil systems, which made them much more prone to price volatility, especially spikes in response to natural disasters and geopolitical events. Thus, hurricanes Harvey, Irma, and Maria in the Atlantic Ocean in 2017, as well as threatening political actions in major oil-producing and transit countries, tended to push prices upward or support higher prices.
Since May, prices have also been affected by Trump’s decisions to withdraw from the Iran nuclear agreement and to impose sanctions blocking American and most European companies from Iran’s market. Furthermore, Trump’s sanctions on Venezuela have accelerated the sharp decline in its oil production amid a severe economic, financial, and humanitarian crisis. These sanctions only heighten fears about the decreasing availability of oil for global markets.
Ironically, well before Trump vented his anger at OPEC this month, the Russians and Saudis agreed to begin producing more oil again. Also before his remarks, prices, which had reached as high as $80 a barrel, had decreased.
For this year at least, prices are not likely to change dramatically. But in the long term, prices will be most affected by whether governments pursue serious energy and industrial efficiency, and by how they manage to integrate Iran back into global oil markets.
David A. Deese is a professor of political science at Boston College, visiting professor at Yale University, and author of Handbook of the International Political Economy of Trade.