As the World Cup got underway in Moscow, Vladimir Putin took the opportunity to discuss ways to control the surging oil prices with Saudi Arabia’s Crown Prince Mohammed bin Salman, ahead of the Opec meeting of the world’s largest oil exporters next week in Vienna.
In May, oil prices reached $80 a barrel (Brent crude), before dropping back to $76, which is still 66% higher than this time last year. Prices could rise much higher, according to Opec’s governor Hossein Kazempour Ardebili, who has warned oil prices could jump to $140 per barrel due to US sanctions against Iran and the collapse of the Venezuelan petroleum industry.
The return to price stability will depend on the outcome of next week’s oil producers’ meeting and a successful formula to increase oil production to replace the lost sanctioned output of Iran and Venezuela. The mood was not helped by Donald Trump using his Twitter account to attack Opec for artificially inflating prices.
Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!— Donald J. Trump (@realDonaldTrump) April 20, 2018
Oil prices are too high, OPEC is at it again. Not good!— Donald J. Trump (@realDonaldTrump) June 13, 2018
Irish industry is more exposed than most in the event of a failure to agree on oil production increase. We have the fourth highest dependency on imported fuels in the EU. But even more worrying is that 76% of all oil products come from the UK. Oil imports cost an estimated €3.7bn last year, accounting for three-quarters of the total cost of energy imports.
The majority of Ireland’s oil imports were used for transport, manufacturing and heating. Any significant increase will impact on the competitiveness of our manufacturing industry. A doubling in price would create widespread export market loss and plant closures.
Shipping lines have already started to introduce oil bunker surcharges on each container of goods. The European exporters’ council has sent a letter to EU Competition Commissioner Margrethe Vestager, calling emergency bunker surcharges “unjustified.” Airlines can be expected to follow with their own oil surcharges on airfreight.
Global demand for oil has been outpacing any gains in production. The main reason is developing nations, especially China and India, have been growing rapidly.
These economies have become increasingly industrialised, s contributing to an increase in the world demand for oil. This is happening against a background of volatile supply driven by US sanctions against Russia and now Iran, as well as turmoil in other oil-producing countries such as Nigeria, Venezuela, and Iraq.
When taken in conjunction with Brexit, Ireland could struggle to ensure a balanced supply of oil and gas at competitive prices. The immediate effects will depend on the sort of Brexit we finally end up with. Over half of the gas that we use for electricity and heating, and three-quarters of our supply of oil products, primarily to fuel the transport and manufacturing sector, are imported via UK ports, pipelines, refineries and subsea interconnectors. Under EU regulations, in the event of shortages, the UK and Ireland have an action plan on gas sharing. The concern with Brexit is that if the UK is no longer prepared to be subject to EU trading rules, what will take its place? Under Brexit, a two-year period of negotiations will determine the terms of the UK’s withdrawal from the EU. At present, primary energy coming into the EU, such as gas from Russia is traded under bilateral agreements. A similar type of arrangement could and needs to be made between Ireland, the EU and the UK.
Failing that, it will fall under World Trade Organisation tariffs which will not be in Ireland’s interest.
Industry analysts are generally agreed that the outlook for the oil market for the rest of 2018 is very uncertain and much depends on the outcome of the Opec countries meeting on June 22 and 23 in Vienna.
John Whelan is a leading international trade consultant