Collusion Between Russia, OPEC Loses Its Sting
SMITH BRAIN TRUST – Blame Russia and OPEC for rising oil prices. Or thank them. Charles E. Olson, professor of the practice and director of the Business Honors Program at the University of Maryland’s Robert H. Smith School of Business, says the United States will benefit overall as oil approaches $70 per barrel. “It’s in our best interest to have the price of oil as high as possible because now we’re an exporter,” he says. “It’s not the way it was before.”
Two things are different this time, Olson says. First is the emergence of U.S. fracking, which provides a low-cost alternative to offshore drilling. The second game-changer came in 2016, when the United States ended a 40-year ban on crude oil exports.
Although fracking has revolutionized global oil and gas, the drilling process remains out of reach in most parts of the world. “While it’s true that underneath the ground there are more reserves that can be gotten out by fracking, the truth of the matter is the only place in the world you can really frack is in the U.S.," says Olson, a former energy industry executive. "Number one, because we've got the technology for fracking. And number two, we've got the infrastructure." This includes an extensive pipeline network and access to oilfield services companies like Halliburton, Schlumberger and Baker Hughes.
The capability gives U.S. firms a competitive edge in global markets. But the relatively small output from fracking also limits its influence. About 10 percent of the world’s oil supply comes from the United States, and about half of that comes from fracking. That’s enough to shock global markets, but not in a sustainable way.
Prices plunged from $145 per barrel in 2008 to $27 in 2016 as U.S. firms cranked up their fracking operations and improved efficiency. But Olson says a market correction was inevitable.
Other countries could not compete at the 2016 price point, and the United States could not meet global demand by itself. Something had to give. “The Russians and OPEC — led by Saudi Arabia and assisted by Kuwait, the UAE and some other countries — have been withholding supply,” Olson says. “Over the last year, that’s dried up the inventory.”
The market manipulation is a form of collusion, but Olson says it's not a conspiracy or anything illegal. “There is no law that stops sovereign nations from colluding with one another,” he says. “It’s perfectly natural to try to manage supply if you can do so legally to keep the prices up.”
Olson predicts prices will continue to rise as markets adjust to fracking. “Even at $70 per barrel, Saudi Arabia can’t balance its budgets,” he says. “Other countries have different numbers.”
Rising prices will hurt Germany, China, India and other energy importing countries. Manufacturers, logistics companies and retailers will suffer at the industry level. And consumers will see inflation as costs get passed on to them. But Olson says anyone with a 401(k) or direct investment in oil and gas could come out ahead.
Oil and gas companies and the banks that finance them will also win. So will the U.S. Treasury, which collects taxes on industry profits. "On balance, as a country, we’re ahead with a higher price because we’re growing with our output," Olson says. "And to the extent that we’re not quite self-sufficient yet, we will be soon."
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