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OPEC Vs The United States: Who will win the oil war?

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Just when you thought Donald Trump’s exit would mean OPEC could enjoy their carte blanche management of the oil markets, Joe Biden, just like every other US President, has found himself in a squabble with the oil cartel over the global prices of oil.

With gasoline prices higher than last seen in 2008, a game of chess has ensued between the United States and the Organization of Petroleum Exporting Countries.

Joe Biden has called for OPEC+ to increase global oil supply so as to bring prices down but OPEC+ indirectly has shrugged off each request as it continues its current approach of “managing supply in line with global demand.”

Historically, higher oil prices lead to higher gasoline prices and the prices at the pump are beginning to affect the lives of American citizens.

The President of the United States knows it is his prerogative to find different ways to bring gasoline prices down. But given the correlation between oil prices and gasoline, Joe Biden has to target bringing down oil prices by forcing OPEC’s hand to increase supply.

Biden recently said they “have tools they can use” to sway OPEC+.

We analyse some of the ‘tools’ the president of the united states might consider using;

  • A coordinated SPR release with a U.S export ban
  • Issuing export waivers to Iran and Venezuela to flood the oil market despite sanctions.
  • Severe diplomatic ties with Saudi Arabia by withdrawing military aid.
  • U-turn on domestic production and drilling. Boost shale.
  • Push and consent to NOPEC bill to Congress
  • Collude with financial funds to short oil prices – speculator frenzy.

The direction from the White House is pointing to an SPR release and a possible US export ban.

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An SPR is a Strategic Petroleum Reserve. Most countries have stockpiles of oil they reserve in case of emergencies, war, or extreme weather conditions. The US currently has about 613 million barrels stacked in its SPR. There is talk that the US will issue millions of barrels to bring down oil prices, but outside an emergency – an SPR release is limited to 30 million barrels.

To make the kind of impact on prices Joe Biden will want, he would have to ensure other countries release out of their own SPR. China did that during the year in their battle with high oil prices by “downplaying their demand” for oil and picking out of their SPR but prices still went up over time.

Releasing oil from the SPR is equivalent to fighting a house on fire with a bucket of water. Given that it’s just a limited amount that can be released, it’s regarded as a temporary measure by most analysts. The SPR release might just be a Queen’s gambit to the game of chess with OPEC.

Banning US oil exports might be a follow-through move by starving international refiners of U.S oil – but there is a possibility this might backfire on home producers.

Another tool at the US disposal is to remove export waivers from Iran and Venezuela. Both nations have been issued sanctions from the United States for humanitarian crimes.

Earlier in the year, there were discussions for the removal of sanctions from Iran. This is a possibility, but the impact that would have on prices may be short-term – given Iran has been allegedly selling oil through the black market.

Encouraging shale production might threaten OPEC+ as they would not want to cede their market share/dominance. However, this move is unlikely as Joe Biden is seen as a champion for “climate change.” Critics of Joe Biden’s energy policies say it is time to encourage domestic production.

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It is common knowledge Joe Biden is pro-green and has been criticized for blocking the Keystone pipeline and issuing an executive order to stop drilling on federal land. These policies were seen to be detrimental to US oil production.

Battling OPEC and high prices is a tall order and tough proposition. Another potential but tense route Joe Biden can deploy is going straight for the head – Saudi Arabia.

Last year, Donald Trump threatened to end U.S. military support for Saudi Arabia if Mohammed bin Salman did not cut production to stop oil price collapse.

Ironically, Joe Biden can deploy the same tactic to threaten Saudi Arabia to produce more, although that would be uncharacteristic of Biden who appears to be more diplomatic than his predecessor, Donald Trump– who was very aggressive and direct when it came to OPEC.

But despite how tough, unpredictable, and tenacious Donald Trump was with OPEC, he never pushed for “NOPEC” – another extreme tool, Joe Biden can use.

The No Oil Producing and Exporting Cartels Act (NOPEC) was a U.S Congressional bill that was never enacted. It was designed to remove the state immunity shield and to allow the international oil cartel, OPEC and its national oil companies to be sued under U.S antitrust law for anti-competitive attempts to limit the world’s supply of petroleum and the consequent impact on oil prices.

Despite popular sentiment against OPEC, legislative proposals to limit the organization’s sovereign immunity have so far been unsuccessful.

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Interestingly, another final tool is a proposition mooted on Twitter by Dr. Ilia Bouchouev, a former President of Koch Global Partners who introduced several energy derivative products and is recognized as one of the pioneers in energy options trading.

He tweeted that “30mb of SPR is tiny compared to financial funds holdings. In theory, Washington can knock off up 300mb+ of financial length and send prices into a tailspin with some unconventional moves on spec regulation. I won’t support it but it’s doable”.

The breakdown of this tweet elucidates on partnering with hedge funds to short oil prices. Recent trends point to financial funds holding long positions on oil which gives support to prices on the futures market. There are legitimate debates that prices of oil on charts are not a true reflection of physical oil prices in the market.

Fleshing out funds’ long positions will scare OPEC+ who are very much wary and cautious of speculators’ threat to oil prices. But this would be very “unconventional and market interfering.”

With inflation at 6.2%, and gasoline prices soaring high, and the Midterm Elections approaching next year – President Biden and the Democrats have to devise a means to bring oil prices down to gain the support of American citizens.

What happens next would be very interesting – data from the US Energy Information Administration technically supports OPEC+ stance that the global oil market would be surplus in the next 50 days meaning current production rates are just about sufficient.

As Sun Tzu puts it, “The supreme art of war is to subdue the enemy without fighting.”

So would Joe Biden wait or act? The ball is now in his court.

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