The latest OPEC meeting conclusions show that the global economy is not as strong as headlines suggest and that industries all over the world are struggling to recover. Indeed, many manufacturing purchasing managers’ indexes continue to signal contraction.
Oil prices have weakened in recent weeks despite the war in Gaza and rising geopolitical risk. At the time of writing this article, Brent crude is trading at $81.62 per barrel and West Texas Intermediate at $76.99. This is a mere 7 percent rise year to date. The average price of the OPEC basket in the latest figure of June 2024 was $83.08.
OPEC+ has agreed to extend its production cuts until 2025 because the outlook for demand remains uncertain. Members of the oil production group see that copper prices have soared by 72 percent in the past five years, rising by 22 percent in the past year alone, and may fear that the push for electric vehicles is shifting demand elsewhere.
Oil prices have performed adequately in the past five years, but they are nowhere close to the levels that producers would consider adequate to balance their budgets. If copper can tell us anything, it’s that Chinese demand and the development of electric vehicles are much stronger forces than fossil fuel demand. However, this may be an incorrect way of looking at things.
Oil prices have stabilized above the $80 a barrel level (Brent), and the OPEC basket is above what analysts consider the price required to balance producers’ budgets. Furthermore, we can’t forget that the concept of a price needed to balance the government budget means nothing. All producing countries are generating excellent profits at these levels. If their government budgets are filled with unnecessary subsidies and items that have nothing to do with energy production, they cannot expect prices to cover social or defense expenditures.
Demand is likely to continue to be weak but growing. Furthermore, one thing is clear: Oil is likely to continue to be a significant part of primary energy needs globally.
OPEC members seem overly concerned about the environmental policies of Western governments. However, they should not fear too much. OPEC member governments may disagree, but central planning never works. In the same way that central planning does not make oil prices rise to the levels that some may desire, interventionism is not working toward its objective of decarbonizing by 2030.
The good news for OPEC members is that Western governments have decided to implement interventionist policies and ignore competition, technology, and creative destruction. As such, oil is likely to remain a key source of energy supply for a long time. The world’s energy transition can only come if we find an alternative to oil that is abundant, has a stable and constant supply, and is economically viable. Solar, wind, and natural gas are essential to a competitive energy transition, but there is no possibility of a real change if the world abandons natural gas and nuclear.
We need to understand that the energy transition can’t come from banning efficient energy sources. It can only come from technology and competition—from free markets. We must understand that oil will continue to be a major source of energy production and that it is perfectly compatible with respect for the environment if technology is used to improve efficiency and sustainability. Ignoring the mining requirements of green energy is as dangerous as forgetting the sustainability potential of fossil fuel production. Instead of using ideology to drive energy policy, we should use technology and open markets.
