The Saudi-Russian Oil Freeze and What it Means for Hybrid and Electric Cars
If you haven’t noticed, early on the morning of February 17, 2016, Saudi Arabia and Russia, backed by Qatar and Venezuela, announced a plan to freeze oil production at January 2016 levels. According to Bloomberg the deal is:
…the “beginning of a process” that could require “other steps to stabilize and improve the market,” Saudi Oil Minister Ali Al-Naimi said in Doha Tuesday after the talks with Russian Energy Minster Alexander Novak….
We, meaning the average guy or gal standing at a gas pump, kind of understand that oil prices couldn’t stay this low forever. We didn’t really know how they’d resume an upward trend, but we knew they would. This deal is one way they the process could start.
How the Saudi-Russia oil deal will provide consistent and upward pressure on gas prices
The deal is a first step towards rebuilding a global oil market. The next step is to get Iran involved. If you missed all the foreign affairs noise over the 3rd and 4th quarter, the Iran nuclear deal allows Teheran to start selling oil on official world markets again. 4 million barrels of Iranian oil started flowing into Europe on Monday, and is rumored to be one of the reasons Moscow and Riyadh brokered the deal. Naturally, Iran is unruffled. This from PressTV Iran:
…(Iranian Oil Minister Bijan) Zangeneh emphasized that a deal to fix a production ceiling for the world’s biggest producers needs to be thoroughly studied and discussed. “It should be specified what they (the producers that gathered in Doha) really mean by it,” the local media quoted the Iranian minister as saying.
He further added that he will host his Venezuelan and Iraqi counterparts on Wednesday for a tripartite meeting to discuss oil. Other reports suggested that the oil minister of Qatar may also join his Venezuelan and Iraqi peers in their trip to Tehran.
“What is important [to consider] is that firstly the oil market is currently oversupplied and secondly Iran will not relinquish over its market share,” Zangeneh said….
It makes sense for Iran to take this position. They are brand new to the market and have committed to a 400,000 barrel/day production output. Every dollar for them is part of a sparkling new revenue stream, and they have the means to influence market price. Why should they let a competitor lead? Second, OPEC isn’t known for keeping their word when it comes to output targets. I’m sure you’d be “shocked” to know that despite quotas, more Middle Eastern oil than is budgeted tends to flow to markets, undercutting pricing plans. Iran shouldn’t jump in before understanding what the other partners are up to. Would you sit at a table and trust Vladimir Putin? Iran is also looking to grow market share among African countries. If the proposed freeze puts Iran at a disadvantage in opening new markets, why join?
Having said that, Iran fully understands the power of cartel pricing. They benefited during the Oil Crisis of the 1970’s and for a few decades afterwards, before sanctions dried up markets. The advantage of moving in concert with other producers guarantees market peace and revenue stability (key for any government).
If Iran gets on board, it should entice other OPEC nations to join. How will join many outside of Russia and OPEC? Who knows. If enough of the producers rally around a common output target, prices should coalesce within a predictable range. Those that don’t join would still enjoy the stability of this new market, and still have some freedom to take profits. I say that in reference to the UK, Mexico, US, and Canadian fracking and shale marketers.
The process of watching oil producers try to create this new market from shambles will be exciting as watching paint dry. Along the way prices might dip below $20/bbl. more than a few times. But once complete, you can bet crude pricing will be in the $40-50 per barrel range.
Solving the problems of Syria and ISIL guarantees price inflation and wild spikes
The other thing we all know as we stand at the gas pump is that there is no foreseeable non-military solution to Syria and ISIL. This will be another driver of higher oil prices.
I started with Syria, because until Assad is assured of something he can be king over, he will continue to ruin opportunities for the West to finish off ISIS and provide a safe place for Syrian refugees to return to.
The Syrian Refugee Crisis was created, in part, by an unwillingness of a GOP Congress to act back in 2013. Couple this with a timid UK Parliament, and you have a portion of the mess we have today. I don’t believe these now-refugees ever wanted to leave home. I also think they would like to go back. It will take military action to give them that opportunity. In that new partitioned Syria, some may not want to go home if that city or town is now on Assad’s side of the partition. But, I’m willing to bet they would prefer going back to a stable side of Syria than stay in a refugee camp.
Whether this means it’s NATO troops or just US forces alone, the West will have to put boots in Arabian sand again.
The runup to this will inflate oil prices. We don’t know how Russia will react to US or NATO troops in Syria. My bet is that Putin won’t risk a world war as long as he knows that Assad and the Russian deep water naval base in Tartus, Syria stay in friendly hands. Any terrorist actions by ISIL will further spike pricing, because we don’t know whether they’ll try to blow up a building in London or a few supertankers in the Strait of Hormuz. Both are bad.
Alt fuels and energy policy are having an effect. Automakers hold the key to increasing fleet economy, spreading technology across the globe
The cars that truly tantalize us are ones like the BMw i8, the Tesla Model S, or the Porsche 918 Spyder; all green cars. Western cars lead the global ideal of automotive transportation, and the technology is getting more and more thrifty with its fuel of choice. This technology will continue to trickle down the product line. It will reach a point where global fleet MPGs will begin to drop, and with them global demand for oil. Is this something that will happen within the next few years? No. But the trends are in place.
These trends could accelerate if the automakers accelerate the availability of hybrid and electric powertrains in popular segments. In the US, they need to move past compliance cars and provide American consumers with mid-size and large SUVs and minivans to fit their lifestyles. We finally have a good-looking and functional hybrid SUV in the Volvo XC-90 T8. We finally have a hybrid minivan with the Chrysler Pacifica Hybrid Minivan. We’ve had sedans for a long time; but some families really need a larger vehicle. It’s taken automakers about a decade to start providing products to meet that demand.
Absent a truly criminal takeover of government environmental protections and fuel economy standards, we will stop using gasoline to power our vehicles in the lifetime of my 5-year old. Since there is no perfect world, we will also see an increase in the use of other power sources related to generating green fuel. However, it’s childish to consider the energy used to charge an EV overnight as harmful as an 8-hour trip in a Hummer H1, or a 1992 F-150 King Ranch. The only place these simplified comparisons thrive is in the rhetoric of politicians, pundits and lobbyists.
Their twisted logic relies on you to forget that once a technology is in place, a never-ending improvement process begins. Battery range has increased over the past 5 years, and we will see further improvements in hybrid and EV battery storage. Formula One has shown us how much horsepower and torque can be squeezed from a lightweight aluminum engine. Volvo is at the forefront of taking that technology and integrating it into passenger cars. Similar advancements will take place with fuel cell vehicles, once they have the time and support to catch on.
A Saudi Arabia-Russia deal on oil production does not mean “unicorns and rainbows” for hybrid and electric cars
However, it does provide a reminder to get back on the path away from the instability and politics of crude oil.
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