Earlier in July, Saudi Arabia directed the OPEC+ alliance to accelerate oil production growth in July and August, in what was widely interpreted as a welcome gesture to Biden’s upcoming visit.
Paradoxically, Mohammad Barkindo, secretary-general of the Organization of the Petroleum Exporting Countries-OPEC (OPEC), died suddenly on July 5, a few weeks before leaving office, sparking speculation that the cause of his death was related to the United States and European countries.
Looking back in history, the competition around crude oil pricing power has won from Western oil companies, to OPEC, to today’s major chambers of commerce exchanges, and everyone is trying their best to become a “trader” of the world economy.
Barkindo served as secretary-general for two consecutive terms. Through a series of shuttle diplomacy, he created the “OPEC+” alliance between OPEC and non-member countries such as Russia, which helped OPEC survive the two major industry downturns (2015-2016 and 2020). — 2021). On the day of his death, Barkindo also met with Nigerian President Buhari.
Originally on August 1, Kuwait’s Haysam Arghis will take over as the next OPEC secretary-general. Algheth has said his priority after taking over is to maintain the OPEC+ (slightly increased production) agreement because it is in the broader interest of the oil industry.
Since the outbreak of the Russian-Ukrainian military conflict in February, there has been no “smoke” of war. As a beneficiary of high oil prices, OPEC does not obey the US’s orders to increase oil production significantly, and is even less willing to participate in the embargo on Russian crude oil.
OPEC Secretary General Mohammad Barkindo
They found that oil prices can be artificially controlled as long as supply is limited.
On March 22, when the Minerva Virgin, carrying 50,000 tons of Russian petrochemicals, docked in New York, it was protested by environmental groups. Bright yellow banners of “Oil Fuels War” were pulled up from the shore. At that time, many European and American countries declared that they would permanently get rid of their dependence on Russia for energy. According to data from the Finnish think tank “Energy and Clean Air Research Center”, as the largest buyer of Russian energy, the EU’s crude oil imports from Russia fell by 18% in May.
The West is not bright, the East is bright. There are indications that barrels of crude are being carried by supertankers heading further into Asia, where India, the world’s second most populous country, is the biggest buyer.
As the world’s second largest oil exporter after Saudi Arabia, after Russia was sanctioned, the economies of Europe and the United States are being “backlashed”. As of April 2022, the cost of raw materials accounted for 60% of the price of a gallon of regular gasoline, according to the U.S. Energy Information Administration. Compared to a year ago, the figure was 52%, and in April 2020 it was only 25%.
The United States cannot control India, and its own inflation has soared, so it has to beat OPEC.
The hand behind the monopoly
At the beginning of the game of competing for oil, players are just independent individuals, individuals who are oil demanders; the use of competition is limited to night lighting.
In the mid-19th century, an American businessman drilled the first oil well in a small river valley in Pennsylvania. So far, crude oil has entered the stage of history. Compared with coal and other lighting raw materials, crude oil burns faster and is more convenient to transport, and a frenzy of drilling for crude oil has hit.
With the outbreak of the second industrial revolution, the application of oil has expanded from lighting to automobiles, ships, airplanes and other fields, almost affecting people’s necessities of life.
In the 1870s, American “oil king” John Rockefeller realized that refining was the real game-changer to win the game. He partnered with chemists to form Standard Oil, which in less than nine years had monopolized most of the U.S. crude oil market.
The oil-poor countries headed by the United Kingdom explored their colonies and semi-colonies and established oil companies one after another. The “oil giants” British Persian Oil Company and the Anglo-Dutch combined Shell Company were all established during this period.
Gelsenkirchen, Germany, May 21, 2022 The Ruhr refinery operated by BP
By 1908, the United Kingdom and the United States discovered a lot of oil in the Middle East, and many companies joined the “Great Chaos War” to extract crude oil in the Middle East. Excess oil supply and price wars have led to persistently low crude oil prices.
In 1928, the three subsidiaries of Standard Oil Company – Mobil Oil of New Jersey, Standard Oil of New York and Standard Oil of California began to join forces. These keen capitalists realize that only by dividing the crude oil “site” and monopolizing part of the market can they make higher profits.
They secretly joined forces with Texaco and Gulf Oil in the United States, as well as Persian Oil and Shell, which were controlled by the United Kingdom, to form a monopoly alliance.
The organization of western multinational oil companies, known as the “Seven Sisters” of oil, was born. These “hands behind the scenes” quietly formed a consensus: by monopolizing the production, transportation, sales and other links of oil on a global scale, controlling the oil supply of oil-producing countries such as the Middle East, and affecting the world oil price. They found that oil prices can be artificially controlled as long as supply is limited.
Before the 1960s, the oil market was firmly in the hands of the Seven Sisters. The long-term secret “division of labor” has allowed the “Seven Sisters” to form an ultra-high tacit understanding of the control of crude oil prices.
Be wary of developing alternative energy
Emerging markets feel threatened by the strength and power of the “Seven Sisters”. They realized that to resist the old monopoly, they had to create it themselves.
In 1960, representatives of five major oil-producing countries, Saudi Arabia, Kuwait, Iran, Iraq and Venezuela, gathered in Baghdad, the capital of Iraq, to discuss how to bring higher oil returns to themselves. OPEC came into being.
At this time, OPEC, representing the crude oil market in the Middle East, and the British and American crude oil markets behind the “Seven Sisters” started a game about oil pricing power.
At the beginning of the game, the “Seven Sisters” still held the power to price oil. Due to historical factors such as the long-term colonization of Middle Eastern countries and the non-nationalization of oil, OPEC’s control of crude oil production is limited to regions outside Europe and the United States. Oil prices can only rise slightly to increase the fiscal revenue of OPEC countries.
By the 1970s, the pattern had reversed. In 1973, a war that lasted for 20 days – the fourth Middle East war broke out. In order to avoid the collapse of Israel, which is under the enemy, the United States launched the “Five Cents Operation” to save Israel. This action prompted Israel to win the war at a pinch.
In order to express their dissatisfaction with the involvement of the superpower in the war, most of the OPEC members, led by Iran, announced an oil embargo on countries that supported Israel, which triggered the first oil crisis.
OPEC not only wants to monopolize oil prices, but also wants to avoid high oil prices and loss of cost advantages.
As Dario, founder of Bridgewater Fund, wrote in “500 Years of Reincarnation”, “Like humans, empires also have a typical life cycle and eventually come to an end”, the monopoly of the “Seven Sisters” finally sank in the 1970s .
With the deepening dependence of the economies of various countries on oil, OPEC has successively adopted methods such as reducing oil production, raising oil prices, and nationalizing oil to increase its international voice over crude oil prices.
After this battle for crude oil pricing power, OPEC’s “golden age” has officially arrived.
However, the “new oil price” led by OPEC has brought chaos to the world economy. The price of crude oil, which has quadrupled in price, has pushed inflation to above 20% in Japan and the United Kingdom, and many countries have entered a recession.
OPEC has no doubt noticed this too. As the world’s largest Organization of the Petroleum Exporting Countries, OPEC has the confidence to set prices, but it is also worried about the long-term adverse impact of excessively high oil prices. In its first Solemn Statement, adopted in 1975, the organization stated: “The price of oil must take into account the availability, utilization, and cost of alternative energy sources.”
Later assassinated Saudi King Faisal
In other words, OPEC not only hopes to monopolize oil prices, but also wants to avoid high oil prices and loss of cost advantages, and ultimately stimulate countries to develop alternative energy sources. Based on this consideration, in times of high oil prices, OPEC often has internal disagreements, and the “hawks” represented by Iran support a sharp rise in oil prices; while the “doves” led by Saudi Arabia hope to take action to make oil prices slow and peaceful rise.
As a result, Saudi Arabia and the United States began to re-bond. In March 1975, King Faisal of Saudi Arabia was assassinated by his sick nephew in the capital Riyadh, which did not change Saudi Arabia’s determination to pegg oil to the US dollar (in US dollars, oil-producing countries use part of their income to buy US bonds).
Crude oil futures are hard to resist the impact of war
Facing the strong impact brought by the two oil crises, Western countries started “counterattack” and “self-rescue”. In order to reduce dependence on oil in the Middle East, many countries are committed to finding alternative energy sources for oil and actively exploiting new oil fields.
Ultimately, the United States invented crude oil futures in 1983. This financial invention is designed to protect the upstream and downstream oil industry chain – trading at a pre-agreed oil price can avoid sudden oil price fluctuations that affect the production cost of the industry.
Light sweet crude oil futures for April delivery fell on the New York Mercantile Exchange on March 14, 2022
WTI crude oil futures represent US-based pricing, while Brunt crude oil futures are OPEC-based pricing.
After years of development, the crude oil futures market, which has both liquidity and investment, plays a key role in international crude oil pricing. Today, two major crude oil futures bellwethers are formed: WTI crude oil futures represent pricing based on the United States, and Brunt (Brent) crude oil futures are based on OPEC.
The difference between the two crude oil futures also lies in the origin and exchange. In 1983, WTI crude oil futures were listed on the New York Mercantile Exchange under the Chicago Mercantile Exchange Group (CME Group). The crude oil is produced in the West Texas region of the United States and is a light crude oil.
Brent crude is listed on the Chicago Stock Exchange’s Intercontinental Exchange (ICE, which acquired London’s International Petroleum Exchange) and trades mainly crude oil from the Brent oil field in the North Sea and other locations in the North Sea, including Africa and the Middle East.
Even with relatively stable crude oil futures, crude prices have soared uncontrollably in the face of unprecedented geopolitical conflict. UBS estimates oil will hit $130 by September; JPMorgan Chase says oil could even surge to $380 in a worst-case scenario — something not reached in any previous oil crisis high.
To ease the growing crisis, U.S. President Joe Biden has asked U.S. oil companies and other big oil producers to increase production. However, pressure from the government has not been successful. U.S. oil executives have a real and self-interested fear: If they increase production too much, crude prices could fall.
At the same time, countries like Saudi Arabia and the United Arab Emirates have been unable to ramp up production quickly to offset the impact of falling Russian supplies on European and American countries. The supply relationship directly affects the price of WTI crude oil futures and Brent crude oil futures. It must be seen that, in the current globalization, commodity prices are affected by changes in major suppliers.
The energy war is destined to be a war of attrition under the game that countries are unwilling to make concessions to harm their own interests. Among them, there are very few winners.