Vestigo Volatility Score: 45%
On August 11, US President Jo Biden called on OPEC, a consortium of the largest oil producing nations, to increase oil production. The request comes as an attempt to curb a rise in global oil prices. With brent crude trading around the USD 70-dollar mark, panic bells have started ringing. Notably, in advocating for an increase in oil production, Biden is ostensibly contradicting with his own pledges for a renewable energy transition. Despite appearances however, the move does not signify a shift in energy strategy. The median voter is every day swayed more and more by the dangers of climate change, with Biden’s Democratic party more attuned than ever to such concerns. By focusing his attention on foreign oil output, while simultaneously curbing fossil fuels domestically, Biden can attempt to save face. Consequentially, Biden can show he is trying, without too much damage to his political capital, to placate the indignant car drivers dealing with inflated prices at the petrol pump.
Constraints to consider:
- The COVID-19 Delta variant is resulting in COVID surges globally, leading to stringent lockdown measures, particularly in Asia. These could spur lower oil prices in the coming months without significant intervention.
- Biden’s consistent pledges for an energy transition to renewables mitigates the likelihood of an agenda shift.
Progressives and Republican legislators have both complained of Biden’s request to OPEC, potentially damaging Biden’s political capital. Certainly, Biden will unlikely bulldoze his way to a negotiating table with OPEC for fear of upsetting the US median voter.
Biden’s rhetoric seemingly contradicts the environmental agenda he campaigned on and his administration’s pledge for Net Zero by the year 2050. An August 9 UN report by the Intergovernmental Panel on Climate Change (IPCC) warned that emissions from greenhouse gases caused by human activities are unambiguously the cause of rising temperatures and therefore of increasing incidence of extreme climate phenomena. The report is one of many that will likely hold considerable sway on policy in the next few years.
Trump was successful in molding OPEC’s oil output to his administration’s demands, negotiating increased production in 2018 to offset the challenges of rising crude prices. The concern then was mainly propagated by falling supplies from Venezuela and Iran. Trump was much more threatening in his demands of OPEC, and in 2020 gave Saudi Arabia an ultimatum that the US would start withdrawing military support if the group failed to comply. It was a different time with a different political paradigm in the US. Biden will not want to contradict his energy transition rhetoric by so forcefully supporting fossil fuel production.
Global oil demand will likely fall, possibly driving falling prices in the coming months
Diminishing demand for oil globally will likely make prices more palatable without too much intervention. OPEC and its allies already agreed to increase production in the coming months with a goal to reversing the production cuts implemented through the pandemic. The complaint from the US administration is that the increases are not enough to offset previous cuts, ensuring inflated prices well into 2022. However, such estimates have not factored in the unpredictability of the virus.
The International Energy Agency (IEA) recently lowered its oil demand forecast for the rest of the year. The IEA is declaring that oil demand will be much lower than anticipated due to the unpredictability of the COVID-19 Delta variant currently shutting down economies. This is particularly the case in Asia. Estimates still indicate demand and growth will increase, but at less than previous predictions. OPEC will meet on September 1 to further discuss oil outputs. While another increase in oil outputs is possible, the group and its allies will be wary of a global economic slowdown.
Biden, meanwhile, will save face. A Democratic base will not castigate him too much, content that mild rhetoric demanding more oil from OPEC can be offset by the pursuit of a renewable energy transition at home. Delta driving falling oil demand in the coming months, and consequently falling oil prices, will further placate the median voter struggling in a COVID economy, if not the renewable energy advocate demanding immediate change.
We base the percentage of our Volatility Score on the material constraints that determine the potential of a global event becoming a long-term global disruptor. We think that anything above the 75% mark should be studied with particular interest.