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Russia/OPEC “oil freeze” is meaningless

Western oil markets rallied briefly on the announcement of another meeting of oil producers in Doha on 17 April to discuss freezing oil output.  However, critics point out that the only countries (e.g. Russia) that have agreed to “freeze” their production are those that have no additional capacity to spare anyway.

Meanwhile, countries that still have the ability to increase production – notably Iran and Libya – are determined to increase their market share even if this comes at the cost of further oversupply and lower prices.

But oversupply is not primarily a result of excess production, but rather a drop in demand in the western and Chinese economies.  This is the manifestation of what oil industry insiders refer to as “the choke chain” – the cycle in which:

  1. Rising demand leads to higher prices
  2. Higher prices lead to additional investment in production
  3. Higher prices lead to lower demand
  4. Lower demand and additional production leads to lower prices
  5. Lower prices lead to increased demand once more.

This particular cycle appears to be more volatile as a result of the financialisation of the US oil industry together with the globalisation of the economy.  Nevertheless, until and unless lower prices translate into renewed demand, production freezes can only exacerbate the problem.  An artificial price increase back to $60 per barrel or more will simply cut western and Chinese demand even further.  The world will still be left with oversupply.

In this sense, a freeze would not solve the problem.  Further cuts would be needed.  But for the time being, the big oil producers believe that maintaining – and gaining – market share is more important than price.  So while the April 17 meeting may be met with cheerleading from the mainstream media, it is unlikely to have any real impact on production.

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