Rapidly increasing oil production is technically difficult. Producers are also careful not to switch to overproduction in oil.
The price of crude oil on the world market has risen sharply since Russia launched its invasion of Ukraine in February 2022. However, the rise in oil prices did not begin then, but two years earlier.
The global corona pandemic dropped the demand for crude oil, and at the same time the price to a historic low. In the spring of 2020, some oil companies even paid for buyers to accept the oil.
The Russian invasion and the sanctions imposed on it sparked a new rise, and now Brent quality costs about $ 120 a barrel. In just over two years, the price has risen almost sixfold.
What causes oil shortages?
Last year, along with Saudi Arabia, Russia was the world’s largest oil exporter. Russia’s oil trade is now constrained both by state sanctions and by companies trying to avoid Russian oil.
Oil companies also made a sudden slowdown in their production when the corona hit. For example, Opec, an organization of oil-producing countries, dropped its production to nearly a third, he says Forbes Magazine (go to another service).
It is difficult to start new production, says the Director General of the Energy Department of the Ministry of Employment and the Economy Riku Huttunen.
– The supply of oil is not very flexible. Regulating supply to a significant extent is slow and cumbersome.
Changing production quotas requires negotiations. The high price of oil is a huge source of income for these countries, so lowering the price by increasing production may not be an attractive idea.
Opec’s quotas in April allow a total of about 33.5 million barrels of crude oil production per day. Of this, Russia accounted for more than nine million. Russia is not an official member of Opec, but it has acted in accordance with the rules of the organization. Opecissa now want to end collaboration (move to another service) With Russia.
Russia’s share of the world oil market has been substantial, with global oil production, including non-Opec countries, at about 90 million barrels per day.
In any case, Opec has succumbed to demands for additional production and increased its production quota by 650,000 barrels on Monday. The United States has already released oil from its emergency stocks in the past. These measures have not had a major impact on oil prices.
Saudi Arabia and Iran
Riku Huttunen estimates that of Saudi Arabia, only Saudi Arabia would have the ability to increase its production fairly quickly.
Saudi Arabia, and at the same time the world’s largest oil company, Aramco, has itself announced that it currently produces 12 million barrels of oil a day. If production is to be sustainably increased by one million barrels, it would require billions of dollars in investment.
Iran has been one of the world’s largest oil countries. However, sanctions imposed because of its alleged nuclear program are almost completely blocking Iran’s oil exports.
Iran’s relations with the rest of the world improved after it signed an agreement to inspect its nuclear facilities in 2016. Former US President Donald Trump however, it withdrew its country from the agreement and imposed new sanctions on Iran that effectively blocked Iran’s oil exports.
The new president Joe Biden has sought to renegotiate the nuclear dispute, but negotiations are slow. No breakthrough is in sight.
For oil to flow back from Iran, for example, its dreaded Revolutionary Guard would have to be removed from the list of terrorist organizations. That would be a lottery win for Biden’s political opponents of Republicans preparing for the congressional by-elections in the fall, estimates The New York Times (moving to another service).
It must also be remembered that Saudi Arabia is Iran’s blood enemy. Saudis are firmly opposed to concessions to Iran.
Will Venezuela start importing oil into Europe?
Venezuela’s hard-line socialist government has driven the country into economic chaos. The country is rampant with corruption, poor governance and human rights abuses. Both the EU and the US have imposed sanctions on the country.
Venezuela is estimated to have the largest oil reserves in the world. The country’s oil production has suffered from sanctions and inadequate maintenance, but if sanctions were relaxed, oil would be available.
Reuters reported that an Italian oil company, Eni, and Spanish Repsol have received permission from the United States to import Venezuelan oil into Europe yesterday, citing unnamed sources. Shipments could begin as early as July.
According to Reuters, ten political prisoners have been released from Venezuelan prisons following talks with the Biden administration. The administration has also promised to resume election talks with the opposition.
Venezuela has previously exported oil to China. Now these cargoes would be diverted to Europe.
Venezuela would not receive money from its oil sales, but the payment would reduce the country’s foreign debt, Reuters reports.
What about the price of oil?
Riku Huttunen of the Ministry of Employment and the Economy does not believe that the price of oil will fall rapidly.
– If the war in Ukraine and with it the sanctions continue, I do not see much chance of a fall in prices.
Citi Research, which examines oil price formation, stresses the importance of ending Iran’s sanctions.
Citi has clearly raised its price estimates for the rest of the year. Despite the increase, bank researchers expect the price of Brent oil to fall from the current level of more than $ 100 to $ 85.
In addition to supply, oil price formation is also affected by demand. The drop in demand brought about by the corona pandemic is beginning to be over.
The high price, of course, encourages consumers and businesses to reduce their consumption and replace oil with alternative fuels where possible. This is appropriate, for example, for the EU, which in its climate policy supports the elimination of fossil fuels.
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