Oil Prices: Central Planners Are Only Delaying an Economic Collapse

Russia, Saudi Arabia, Qatar, and Venezuela have agreed to freeze production. Will this finally help to support oil prices? Not yet. Skepticism abounds. Even if Saudi Arabia and Russia have agreed to freeze oil production, the markets had expected an actual cut in production. The current arrangement provides for a less exciting prospect. The four countries are not to exceed January 2016 production. Regardless of cuts, the gains are short-term and the risk of economic collapse remains.

The ministers discussed measures to support the market a one-and-a-half years after the price of crude fell by two-thirds. The price ended at $30.00 a barrel, its lowest level in 13 years.

Despite the enormous losses that oil producers have endured, and even after some $400 billion in investments have evaporated, the market is not yet close to a breakthrough. The decrease in production still represents a step forward: better than nothing. Whether this “minimalist” agreement holds is another matter. So far, the international benchmark Brent crude surged more than five percent to reach $35.00 per barrel. It settled at $34.00 per barrel.

The optimists see the deal as a constructive first step. After keeping the taps running on high for the past 18 months, the fact that Russia and OPEC have eased their war to secure market share and force out rivals, if only by a little, can restore some balance to the market. (Source: “Oil price: Saudi Arabia and Russia reach supply deal – but will it be enough?” The Week, February 16, 2016.)

One of the question marks remains: Iran. Russia’s ally in geopolitics but a market rival for oil, Iran, which just emerged from a three-and-a-half decade-long “time out” has just delivered its first oil shipment to Europe. The agreement is all the more remarkable because Saudi Arabia and Russia are at risk of fighting each other in Syria now. Saudi Arabia and Turkey are considering deploying ground forces in Syria to fight the very same militias, getting tactical and battle support from Russia.

Iran’s oil production contributes to the two million barrels per day of excess supply. Iran confirmed that it would not give up any of its global oil market share.

Iran’s oil minister, Bijan Zanganeh, said that while the market is facing a surplus, he stressed that his country would not join in the cuts. Zanganeh will meet with the ministers of Venezuela and Iraq in Tehran on February 17, but Iran’s goal is to increase production, targeting pre-sanctions levels. Iran expects Japan to reach that target soon. 

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