JPMorgan Chase chairman and chief executive officer Jamie Dimon said he expects the price of oil to go up — all the way up to $175 a barrel. True, this comes in the wake of two back-to-back developments: the European Union’s decision to abstain from Russian oil and oil cartel Opec’s decision to raise output to a less than fulsome extent than had been anticipated. Even then, and notwithstanding Dimon’s gender, it is difficult not to conclude that the lady doth protest too much.
Several factors are acting against a near 50% rise in the price of oil above present levels. One is the moderation in demand that covid has brought about. The International Energy Agency says that global demand in 2022 is expected to be 99 million barrels a day, as against the pre-pandemic forecast of 103 million barrels a day. The Ukraine war and covid lockdowns in China have further depressed likely demand, because of the expected fall in global growth. The same people on Wall Street who fret over high oil prices also worry about belated and sharp rate hikes by the US Fed, in its attempts to bring inflation down, also landing the US economy in a recession. Recessions depress oil demand.
But it is not so many conditions of demand as conditions of supply that make a sharp and sustained rise in oil prices unlikely. To begin with, Europe has banned Russia’s seaborne oil. Oil flowing into eastern Europe by pipeline will continue to flow. Now, it is difficult to understand why oil that, in any case, leaves Russia by tanker, cannot move to another destination: tankers are not built to home in Europe. All that is required is for Russia to find alternate buyers.
Now, there could be a temporary disruption of Russian oil supplies while it finds alternate buyers. The price of oil could nudge up in the interim. That will make Russian discounts more appealing than before. Further, it would tempt OPEC members to produce more than what their member quotas allow them to. No, the oil cartel members are not boy scouts and do cheat on their commitment to stick to production quotas.
As oil prices go up, a very powerful lobby will begin putting pressure on western governments to bring prices down: consumers, who find inflation eating into their purchasing power, with food and energy prices doing most of the gobbling. Their roar of protest will send governments scrambling to increase oil supplies.
Bringing on-stream production capacity that has been put out of action by previous sanctions is one option. Both Iran and Venezuela can add millions of barrels to the global supply. Iran has been clandestinely producing and shipping oil, even if not at full capacity. Iran is best placed to increase production, should the US and the EU find their way to reviving the Iran nuclear deal that President Trump had torpedoed. Venezuela’s oil infrastructure is in a bad shape, and it will need time and investment to bring production back to capacity. So, however, will Europe transition from Russian oil to oil from other sources.
India should welcome Russian oil, especially when offered at a discount. Covid has hurt large parts of the informal economy. People are hurting. There is no reason for India to be part of the ‘any cost’ at which the West wants to see Russia brought to its knees, even as India’s external affairs minister S Jaishankar pointed out, European countries continue to buy gas from Russia. Buying Russian gas is an economic imperative for Europe. Buying the cheapest available oil is not just an economic imperative for India, but also, given its desperate need to improve the lives of so many, a moral one.
WTI Long (Buy)
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