On September 23, Algeria hosted a meeting of the OPEC+ ministerial monitoring committee, which discussed the overall situation on the oil market. Earlier US President Donald Trump called on OPEC to reduce oil prices immediately, naming it a “monopoly” and accusing it of manipulating the market.
OPEC member states do not seem to be willing to reduce oil prices, as the September 23 meeting shows. In my opinion, this is short-sighted behaviour as it will hurt oil-producing countries in the longer term. It should be noted that the call to reduce oil prices comes from a major exporter, as US oil production is booming at record levels with exports surpassing most OECD countries. OPEC members should be concerned about potential causes and timing of the next oil price crash.
The escalating trade war between the US and China dampens expectations on demand growth, while sanctions on Iran put pressure on the supply side. Gaps in supply from Iran can be filled by other producers as much spare capacity seems available, yet the September 23 meeting revealed major contradictions between OPEC countries to an extent that brings a potential existential crisis in sight. OPEC+ countries need to understand the market dynamics very well and find a compromise between short-term and long-term goals. OPEC itself trimmed its forecast for 2019 global oil demand growth, emphasizing the downside risk.
The World Oil Outlook launched a few days ago at the OPEC+ meeting in Algiers frames a bright long-term future for oil with demand revised upwards, yet acknowledges that expansion of electric vehicles can reach a level of about 13% in 2040. However, the Paris Declaration on Electro-Mobility and Climate Change adopted at the 2015 United Nations Climate Change Conference calls for at least 20% of all road vehicles globally to be electrically driven by 2030. The long-term outlook of the oil market is closely related to the development of the electromobility market since electricity substitutes oil products in transportation. High oil prices accelerate the diffusion of electric vehicles, closing the feedback loop. In other words, the current high level of oil prices threatens demand growth and increases downward pressure on oil prices in the longer term.
Especially countries like Turkey facing a major challenge in coping with high oil prices in combination with high foreign exchange rates will focus on technologies and ways to reduce the need for oil imports. The short-term outlook of the oil market depends predominantly on geopolitical considerations, yet has important long-term consequences for the market itself. Nevertheless, oil markets seem to be heading towards higher volatility and instability.
