Monday, March 21, 2016

A Step Forward

Traditionally, Saudi Arabia has been the "swing producer" of oil.  If the price of oil was so high that it was hurting its customers, Saudi Arabia could increase production enough to lower market prices.  If the price of oil was so low it was hurting the oil producers, as it is now,  then Saudi Arabia could lower production enough to raise market prices -- but only after extracting promises from other oil producers that they would also cut their production by some smaller amount.  It did not want to carry the cost of any production cuts by itself, understandably.

When the price of oil began to collapse at the beginning of the year, the world naturally looked to Saudi Arabia to act as the swing producer and cut its oil production.  This time, however, Saudi Arabia said it would not do so, because other oil producers were liars, promising to cut oil without actually doing so.  The price of oil then plummeted.

By mid-February, Saudi Arabia, along with Russia, Ecuador, & Venezuela, promised to freeze their production levels IF Iran would do the same, which it won't without further negotiation.  They will meet again next week to finalize details.  But, here is what is different:  monitoring!  Two companies are negotiating to actually estimate production.  This is more difficult than expected.  Satellites can now be used to keep track of oil tankers moving around the world, but people with binoculars are still required to estimate cargo loads by how deep the ships are submerged as they leave port.  In addition, the only way to monitor oil being moved by pipelines (about 30% of Russia's) is by infra-red technology, but it can now be done.

While there are lots of details to be worked out, we have come a long ways in assuaging the fears of Saudi Arabia that all oil producers are liars.

Maybe, honesty will actually break out in the Mideast . . . ??