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The week in energy: Opec plans higher output


One hundred years ago this month, a unit of the Russian Baltic fleet in the city of Petrograd called for the Bolshevik government to resign. The sailors, militant supporters of the revolutions of 1917, had already become disillusioned. This week in St Petersburg, as the city is now known again, the energy ministers of Russia and Saudi Arabia discussed whether an initiative they had once enthusiastically supported had similarly gone a bit too far.

It was the entente between Alexander Novak, Russia’s energy minister, and Khalid al-Falih, his Saudi counterpart, that made possible the 2016 agreement of Opec and non-Opec producers to curb their output by 1.8m barrels a day. Their agreement, helped by factors including the collapse of Venezuela’s oil industry and President Donald Trump’s decision to reinstate US sanctions on Iran, lifted Brent crude from below $30 a barrel in early 2016 to $80 a barrel this month. That increase was very welcome for oil-producing economies battered by the slump since 2014, but started to raise questions about whether prices were now in danger of rising too high. The International Energy Agency has already warned that it expects the price rise to curb oil demand growth this year, and there have been warnings that a further increase to $100 a barrel or higher could cause a world recession.

The result of Mr Novak’s meeting with Mr Falih suggests they are taking those concerns seriously. Russian and Saudi officials indicated on Friday morning that they backed a plan to raise the output of Opec and its allies by up to 1m b/d, with the decision to be confirmed at the group’s meeting in Vienna on June 22. The fears about rising prices felt by large oil-consuming countries were clearly front of mind for Opec officials. Mohammad Barkindo, the cartel’s secretary-general, said Mr Trump’s tweet about oil and Opec last month had prompted ministers to start thinking about increasing production. The Saudi energy ministry issued a statement saying that Mr Falih had called Nur Bekri, the head of China’s National Energy Administration, “to discuss continued joint co-operation between the two countries in the energy sphere, and to review the present situation in the global oil market”. The statement quoted Mr Bekri as having indicated that China hoped “Saudi Arabia can take further substantial actions, to guarantee adequate supply in crude oil market and make contribution to stabilise international oil price, together with other relevant countries”. With the two largest consuming countries both warning about prices, the pressure was building.

Mr Falih said oil supplies were likely to be increased gradually, but the effect on the markets was immediate. Brent crude dropped more than 3 per cent on Friday morning to a little over $76 a barrel, while US benchmark West Texas Intermediate fell below $68. With the details of the plan — particularly the allocation of the increase in output between countries — still to be determined, there are likely to be more fluctuations to come before June 22. An important message from Friday’s news, though, is that the alliance between Russia and Saudi Arabia is still one of the crucial factors driving oil supplies and prices. Petrologica, a research firm, published a useful analysis arguing that “we should expect co-ordinated market management to remain a fixture for some time to come yet”.

The relief from Opec has come too late for US motorists planning to travel this Memorial Day weekend, often counted as the start of the “driving season”, when people go on trips in their cars. Petrol prices this year are their highest since 2014, and up 22 per cent from a year ago. The American Fuel & Petrochemical Manufacturers, an industry group, pointed out in a blog post that “the increase in the price of gasoline is directly tied to the increase in the price of crude oil, which is set in the world market, not by the refineries that produce the gasoline”.

Rising fuel costs are eating into the benefit for US consumers of the tax cuts passed at the end of last year, and for some people on lower incomes have wiped it out completely. Democratic politicians have attempted to capitalise by blaming Mr Trump for the increase. Charles Schumer, the Democratic leader in the Senate, on Wednesday urged the president to “stand up to Opec”, asking “Why doesn’t he ask them to lower their prices?” Mr Trump might respond that that is exactly what he has done.

Higher oil prices should be good for manufacturers of electric cars, but fuel costs seem unlikely to have played much of a role in their adoption so far. The Energy Information Administration this week published data showing the “slow growth” of electric vehicle sales in the US, and also pointing out that ownership varies widely according to household income. Of the American households with an electric car, just 3 per cent have an income less than $25,000, while 42 per cent have incomes over $150,000 a year.

Confidence in the future electrification of road transport has taken a knock recently because of Tesla’s struggles with its Model 3, its supposedly mass-market car. Consumer Reports this week took a look at the Model 3, and concluded that while the car had “record range and agile handling”, it also had “big flaws — such as long stopping distances in our emergency braking test and difficult-to-use controls”. Elon Musk, who has been firing back on Twitter against criticism in the media, expressed scepticism about some of Consumer Reports’ conclusions, but later said the company planned to fix the Model 3’s flaws.

One group that has found the rise in crude very welcome is investors in oil companies, which are enjoying “windfall profitability”, in the words of Lydia Rainforth of Barclays. Oil company boards have been under renewed pressure from shareholders over their responses to the threat of climate change. But at Royal Dutch Shell’s annual meeting on Tuesday, a motion from some shareholders calling for the company to set firm targets for cutting emissions was heavily defeated. Investors owning 95 per cent of the shares, including Norway’s sovereign wealth fund, agreed a board recommendation and voted against the proposal. However, a sizeable minority rejected the board’s position on the pay package for chief executive Ben van Beurden. ExxonMobil, which has its annual meeting next week, demonstrated its commitment to curbing greenhouse gas emissions by setting out targets for reducing methane leakage by 15 per cent and flaring by 25 per cent.

Renewable energy is booming in California, but the state’s greenhouse gas emissions have risen, apparently because generators are being careful about using hydropower resources.

In Canada, the battle over finding a new route to the Pacific coast for Alberta’s oil continues to heat up. The proposed C$7.4bn expansion to the Trans Mountain pipeline system, which runs from Alberta to a terminal near Vancouver, is backed by Canada’s federal government but opposed by British Columbia, which is concerned about the risk of spills from tankers that would transport the oil to world markets. In response, Alberta has passed legislation giving its energy minister the power to shut off petrol supplies to British Columbia. The disagreement is being fought out through the courts, with some success this week for the Trans Mountain project, but there are more legal battles to come. Kinder Morgan, the company that operates Trans Mountain, has set a deadline of May 31 for deciding whether to scrap the expansion project completely. The dispute has been described as “unprecedented in Canadian history”.

There is still uncertainty over the future of US trade negotiations with China, but increased American oil and gas exports look like one mutually acceptable way to help close the bilateral deficit. Treasury secretary Steven Mnuchin said there was a “massive opportunity” in China for increased US energy exports.

The rise of renewables, energy efficiency and storage is bad news for companies making equipment for fossil fuel generation, including General Electric and its rivals Siemens and Mitsubishi Heavy Industries.

And finally: You may have to forgive the excruciating pun in the headline, depending on your tolerance for such things, but there was a very interesting piece on FT Alphaville from Jamie Powell, on what the long survival of the whaling industry can tell us about the outlook for oil demand.

Other views

Nick Butler — Batteries are the next frontier of industrial competition

Amrita Sen and Yasser Elguindi — The era of ‘lower for longer’ oil prices is dead

Leslie Hook and Benedict Mander — The fight to own Antarctica

Joshua Rhodes — Texas’ electricity market will see a make-or-break test this summer

Marc Gunther — Philanthropy, groupthink and climate change

Samantha Gross — Geopolitical implications of US oil and gas in the global market

Quote of the week

“We must learn from this devastating event and apply the lessons throughout Shell and share it with other members of our industry. We must learn, otherwise our bond of trust will fail.” — Speaking at Royal Dutch Shell’s annual meeting, Chad Holliday, the company’s chairman, discusses the fuel tanker accident in Pakistan last year that killed 221 people. The board’s failure to discuss the effect of the disaster on executive bonuses was one reason why Institutional Shareholder Services, the advisory firm, urged investors to reject Shell’s 2017 remuneration report. At the company’s annual meeting on Wednesday, a quarter of the total votes were cast against the executive remuneration packages: a significant minority, but not enough to stop the pay report being approved.

Chart of the week

The International Energy Agency has launched a fascinating new site called “Tracking clean energy progress”, showing information on whether different technologies are on course for its sustainable development scenario: reaching the Paris Agreement goal of keeping the rise in global temperatures well below 2C, delivering universal energy access, and significantly reducing air pollution. It is well worth having a browse around, but this is one particularly striking chart, showing the carbon intensity of the world’s energy system. It has been essentially flat for 30 years, but needs to fall sharply by 2040 to be on track for that sustainable development scenario.

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