May 9, 2025 • 10 mins
Crude oil prices have fallen sharply since the start of the year, caught up in the market turmoil of Donald Trump's trade war. The OPEC+ group of oil-producing countries has responded by increasing production, which has pushed prices down further. Why are these nations intentionally hurting their own revenues? Bloomberg Opinion columnist Javier Blas joins host Stephen Carroll to explain.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll and
this is Here's Why, where we take one new story
and explain it in just a few minutes with our
experts here at Bloomberg.
Speaker 2 (00:19):
Take a look at the price of energy this morning.
Brent has slipped through sixty dollars. Fifty nine dollars is
where we're treating. We are basically back to a four
year low again.
Speaker 1 (00:28):
When US President Donald Trump was inaugurated to his second
term in January, oil prices on the international benchmark Brent
crude were around eighty dollars a barrel, the highest since
last summer, but in early May they dipped to around
sixty dollars, the lowest in four years. One side of
the story is fears over how big oil consumers like
China might be hit by US trade tariffs, but there's
(00:51):
also been a change from the countries that produce oil.
At its latest meeting, the OPEC plus group of oil
producing nations decided to increase production for a second month
in a row.
Speaker 2 (01:02):
OPIK has been trying to balance the supply and demand
and find that the continuously problem with the overproducers.
Speaker 1 (01:09):
Your saudis you're like, why am I going to keep
subsidizing their output at the expense of mind?
Speaker 3 (01:14):
OPEC always seems to act more cohesively when there's a crisis,
when they're really up against them.
Speaker 2 (01:18):
The question that everybody is asking is why why did
OPEK plus decide to increase the amount of barrels that
they're putting back to the market by more?
Speaker 1 (01:28):
So, here's why oil producers are driving prices lower. Bloomberg
opinion Columnistavier Blast joins me.
Speaker 4 (01:39):
Now for more.
Speaker 1 (01:41):
Javier, First of all, a bit of context. How much
influence does OPEC plus have over global oil prices?
Speaker 3 (01:48):
OPEC plus has a lot of influence of where global
oil prices because it produces, when you count all the barrels,
more than fifty percent of global oil production on. So
what it does can push prices up and down. And
we have seen in the past that the cartel has
been quite effective in cutting production, in restricting the supply
to push prices much higher at times. Saudi Arabia semi
(02:11):
official policy has been to keep prices as close as
it was possible to one hundred.
Speaker 4 (02:16):
Dollars a barrel.
Speaker 3 (02:17):
So they are very influential, perhaps not as influential as
in the nineteen seventies, the time of the two oil crisis,
but it still remained probably the most important factor in
the oil market.
Speaker 1 (02:29):
And who holds the power within the group.
Speaker 3 (02:32):
Within the group, one country and perhaps another country that
really hold the power. Those are Saudi Arabia first and foremost,
and then Russia. They are the number two and number
three global producers. The largest oil producer nowadays is the
United States thanks to the shale revolution, but Saudi Arabia
and Russia pump each about ten million barrels a day. Again,
(02:56):
when you count all the barrels, not just scrude but
other liquids, and both are very influenzial.
Speaker 4 (03:02):
They produce more than double.
Speaker 3 (03:03):
The next member of the OPEK class Alliance, and that
is a group that it was formed about a decade ago,
exactly at the end of twenty sixteen. And the group
is the traditional members of the OPEC cartel plus a
few other countries. That's the plus on OPEK plus that
decided to join forces. But they are not formal members
(03:27):
of the oil cartel. It's what we call a club,
an alliance, or a cartel and a few friends. The
friends are Russia, Katakhstan and a number of other non
OPEC producers that in twenty sixteen decided that joining forces
with Saudi Arabia and the rest of OPEK made sense,
made economic sense, and they have been until now very
(03:49):
effective in managing the market. But from time to time,
not everyone inside this family gets along well and agrees.
Speaker 1 (03:59):
With the decisions. He pointed out in your recent column.
Cartels exist to drive prices higher. So why then, is
opek plus increasing supply, which is a move that would
drive prices down.
Speaker 4 (04:10):
Yes, you are absolutely right.
Speaker 3 (04:11):
I mean, the only reason for having an oil cartel
is to push the price of the commodity that that
cartel aims to control higher.
Speaker 4 (04:19):
You do not try to lower prices.
Speaker 3 (04:21):
That will be like a policy of shooting yourself in
the food and that's not what ragional countries do. However,
from time to time oil cartels face an economic dilemma,
one of the members just refuse not to play by
the rules. And the rules here are the production on quotas.
The quotas are the official level that the cartel sets
(04:44):
for each of their members how much oil they need
to produce on a given month. For opek Plus, the
group sets an official level for the whole group and
then quotas for each of their members. And what happened is,
from time to time one of those countries say well,
I want to produce more. They may have a new
(05:07):
oil field coming on a stream, they may need the money.
And at the end of the day, this is a
prisoner's dilemma. The cartel can only do one thing when
someone is cheating is to apply some diplomatic pressure, perhaps
asking politely nicely, please would you behave to start being
(05:30):
a bit more forceful on that diplomatic pressure and gone
publicly we are not happy. This member of the cartel
is not behaving by the rules, is cheating on us.
And if that doesn't work, the only other solution is
to say, well, then we are all gonna do the same.
We are all gonna produce about the targets. We are
gonna all produce a lot more. The price of oil
(05:52):
is gonna go down, and you're gonna pay the financial
price of directions. Obviously, that is shooting yourself on the foot.
To attack that cheating country, you need to share the
pain of much lower oil prices. And the Soudiasts have
faced that situation in the past. They have faced oil
producers have cheat on Saudi Arabia and the southdist have
(06:15):
launched price wars against those cheating countries in the past
to force them to play by the rules. They did
in the eighties. Actually in eighty five is the first example.
They launched effectively a price war against every other member
in OPEC. They launched a similar price war in nineteen
ninety eight against Venezuela, and they lounged a price war
(06:36):
against Russia in twenty twenty, So there is a lot
of historical president.
Speaker 1 (06:41):
Has it worked.
Speaker 4 (06:42):
It has worked, but it is a very crude. Forgive
my plan.
Speaker 3 (06:46):
It is a very crude way to manage the oil
market because the Southeast ultimately got their way, but only
after significant pain on themselves, and at times it's not
one hundred percent clear that the Southeast got what they wanted,
and they were in real trouble. In nineteen ninety eight,
(07:08):
Saudi Arabia was in massive economic pain. Ultimately they got
what they wanted, but they almost bound wrapped themselves in
the process.
Speaker 1 (07:17):
So how much pain can Saudi Arabia take on this front?
Two bring the members of the group into line here.
Speaker 3 (07:25):
The problem is that the biggest cheating country is Kathakhstan,
which is not a formal member of OPEK, but only
part of this plus alliance, and that has a bit
of at trouble because I don't think that the Saudist
have nearly as much diplomatic leverage over Kazakhstan as they
have had with other members, that they are much closer
(07:47):
than part of the actual god of OPEK. And second,
what we call the break even prize, so typically the
price at which the budget balances excluding death each much
higher in Saudi Arabia Thanakistan. Of course, the Saudist can't
take on debt, they can't reduce their petro dollar reserves.
But ultimately you really aim to try to keep your
(08:09):
budget within the price of oil and not taking too
much depth. And I think that in this situation Kathakhstan
can take a lot more financial pain than Saudi Arabia.
Speaker 4 (08:21):
This could be quite the standoff. It is a.
Speaker 3 (08:23):
Standoff, and so far what we are seeing is kataks
Stan so far is getting the pressure. Clearly they are
noticing it, but they are saying yeah, we hear you,
which almost sounds to me the same thing that a
teenager respond to their parents when their parents are asking
the teenager to clean their room. Yes, mother, I hear you,
(08:48):
and the room remains untidy for the next three months.
Speaker 1 (08:52):
That's one side of the untidy room. The other factor
in all of this when I'm thinking about prices is
the demand side. What is just briefly the current thinking
about what sort of effect the trade war and the
effects on growth could have on an oil demand.
Speaker 3 (09:05):
Before the trade war started, the consensus in the oil
market war that global oil demand was going to growth
about one percent, so that's roughly about a million borrows
a day, or to put it in equal terms to
an oil producer, we were going to need an Extralivia
in twenty twenty five. At the moment, everyone is reducing
those forecasts, and the range goes between the most optimistic
(09:29):
that they think that we're going to have an oil
demand of our around seven hundred thousand borrows a day
is thirty percent reduction in the forecast, to people that
they are beginning to think, well, this is really getting
very slow.
Speaker 4 (09:43):
The trade war remains unresolved.
Speaker 3 (09:45):
Yes, the Chinese and the Americans are talking, but they
are talking about talks, so probably this is going to
be worse, and they are expecting oil demand to slow
down to about three hundred to five hundred thousand boroughs
a day. Still everyone saw so far is talking about
a slowdown in the growth. We are not talking about
a contraction in oil demand, which we saw obviously during
(10:08):
the pandemic, but that was an unprecedented situation where everyone
was not traveling. But we saw a contraction in oil
demand back in two thousand and eight two thousand and
nine during the global financial crisis. So if the global
economy is slows down a lot, we may move from
a slow down in oil demand to an actual contraction, which,
together with Opek fighting internal dissidents, that could be a
(10:33):
recipe for much lower oil prices.
Speaker 1 (10:35):
Okay, heavier Plaspoomberg Opinion columnsts. Thank you very much, and
you can read Hava's latest work at Bloomberg dot com
Forward slash Opinion. For more explanations like this from our
team of three thousand journalists and analysts around the world,
go to Bloomberg dot com Forward Slash Explainers. I'm Stephen Carroll.
This is here's why. I'll be back next week with more.
Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll and
this is Here's Why, where we take one new story
and explain it in just a few minutes with our
experts here at Bloomberg.
Speaker 2 (00:19):
Take a look at the price of energy this morning.
Brent has slipped through sixty dollars. Fifty nine dollars is
where we're treating. We are basically back to a four
year low again.
Speaker 1 (00:28):
When US President Donald Trump was inaugurated to his second
term in January, oil prices on the international benchmark Brent
crude were around eighty dollars a barrel, the highest since
last summer, but in early May they dipped to around
sixty dollars, the lowest in four years. One side of
the story is fears over how big oil consumers like
China might be hit by US trade tariffs, but there's
(00:51):
also been a change from the countries that produce oil.
At its latest meeting, the OPEC plus group of oil
producing nations decided to increase production for a second month
in a row.
Speaker 2 (01:02):
OPIK has been trying to balance the supply and demand
and find that the continuously problem with the overproducers.
Speaker 1 (01:09):
Your saudis you're like, why am I going to keep
subsidizing their output at the expense of mind?
Speaker 3 (01:14):
OPEC always seems to act more cohesively when there's a crisis,
when they're really up against them.
Speaker 2 (01:18):
The question that everybody is asking is why why did
OPEK plus decide to increase the amount of barrels that
they're putting back to the market by more?
Speaker 1 (01:28):
So, here's why oil producers are driving prices lower. Bloomberg
opinion Columnistavier Blast joins me.
Speaker 4 (01:39):
Now for more.
Speaker 1 (01:41):
Javier, First of all, a bit of context. How much
influence does OPEC plus have over global oil prices?
Speaker 3 (01:48):
OPEC plus has a lot of influence of where global
oil prices because it produces, when you count all the barrels,
more than fifty percent of global oil production on. So
what it does can push prices up and down. And
we have seen in the past that the cartel has
been quite effective in cutting production, in restricting the supply
to push prices much higher at times. Saudi Arabia semi
(02:11):
official policy has been to keep prices as close as
it was possible to one hundred.
Speaker 4 (02:16):
Dollars a barrel.
Speaker 3 (02:17):
So they are very influential, perhaps not as influential as
in the nineteen seventies, the time of the two oil crisis,
but it still remained probably the most important factor in
the oil market.
Speaker 1 (02:29):
And who holds the power within the group.
Speaker 3 (02:32):
Within the group, one country and perhaps another country that
really hold the power. Those are Saudi Arabia first and foremost,
and then Russia. They are the number two and number
three global producers. The largest oil producer nowadays is the
United States thanks to the shale revolution, but Saudi Arabia
and Russia pump each about ten million barrels a day. Again,
(02:56):
when you count all the barrels, not just scrude but
other liquids, and both are very influenzial.
Speaker 4 (03:02):
They produce more than double.
Speaker 3 (03:03):
The next member of the OPEK class Alliance, and that
is a group that it was formed about a decade ago,
exactly at the end of twenty sixteen. And the group
is the traditional members of the OPEC cartel plus a
few other countries. That's the plus on OPEK plus that
decided to join forces. But they are not formal members
(03:27):
of the oil cartel. It's what we call a club,
an alliance, or a cartel and a few friends. The
friends are Russia, Katakhstan and a number of other non
OPEC producers that in twenty sixteen decided that joining forces
with Saudi Arabia and the rest of OPEK made sense,
made economic sense, and they have been until now very
(03:49):
effective in managing the market. But from time to time,
not everyone inside this family gets along well and agrees.
Speaker 1 (03:59):
With the decisions. He pointed out in your recent column.
Cartels exist to drive prices higher. So why then, is
opek plus increasing supply, which is a move that would
drive prices down.
Speaker 4 (04:10):
Yes, you are absolutely right.
Speaker 3 (04:11):
I mean, the only reason for having an oil cartel
is to push the price of the commodity that that
cartel aims to control higher.
Speaker 4 (04:19):
You do not try to lower prices.
Speaker 3 (04:21):
That will be like a policy of shooting yourself in
the food and that's not what ragional countries do. However,
from time to time oil cartels face an economic dilemma,
one of the members just refuse not to play by
the rules. And the rules here are the production on quotas.
The quotas are the official level that the cartel sets
(04:44):
for each of their members how much oil they need
to produce on a given month. For opek Plus, the
group sets an official level for the whole group and
then quotas for each of their members. And what happened is,
from time to time one of those countries say well,
I want to produce more. They may have a new
(05:07):
oil field coming on a stream, they may need the money.
And at the end of the day, this is a
prisoner's dilemma. The cartel can only do one thing when
someone is cheating is to apply some diplomatic pressure, perhaps
asking politely nicely, please would you behave to start being
(05:30):
a bit more forceful on that diplomatic pressure and gone
publicly we are not happy. This member of the cartel
is not behaving by the rules, is cheating on us.
And if that doesn't work, the only other solution is
to say, well, then we are all gonna do the same.
We are all gonna produce about the targets. We are
gonna all produce a lot more. The price of oil
(05:52):
is gonna go down, and you're gonna pay the financial
price of directions. Obviously, that is shooting yourself on the foot.
To attack that cheating country, you need to share the
pain of much lower oil prices. And the Soudiasts have
faced that situation in the past. They have faced oil
producers have cheat on Saudi Arabia and the southdist have
(06:15):
launched price wars against those cheating countries in the past
to force them to play by the rules. They did
in the eighties. Actually in eighty five is the first example.
They launched effectively a price war against every other member
in OPEC. They launched a similar price war in nineteen
ninety eight against Venezuela, and they lounged a price war
(06:36):
against Russia in twenty twenty, So there is a lot
of historical president.
Speaker 1 (06:41):
Has it worked.
Speaker 4 (06:42):
It has worked, but it is a very crude. Forgive
my plan.
Speaker 3 (06:46):
It is a very crude way to manage the oil
market because the Southeast ultimately got their way, but only
after significant pain on themselves, and at times it's not
one hundred percent clear that the Southeast got what they wanted,
and they were in real trouble. In nineteen ninety eight,
(07:08):
Saudi Arabia was in massive economic pain. Ultimately they got
what they wanted, but they almost bound wrapped themselves in
the process.
Speaker 1 (07:17):
So how much pain can Saudi Arabia take on this front?
Two bring the members of the group into line here.
Speaker 3 (07:25):
The problem is that the biggest cheating country is Kathakhstan,
which is not a formal member of OPEK, but only
part of this plus alliance, and that has a bit
of at trouble because I don't think that the Saudist
have nearly as much diplomatic leverage over Kazakhstan as they
have had with other members, that they are much closer
(07:47):
than part of the actual god of OPEK. And second,
what we call the break even prize, so typically the
price at which the budget balances excluding death each much
higher in Saudi Arabia Thanakistan. Of course, the Saudist can't
take on debt, they can't reduce their petro dollar reserves.
But ultimately you really aim to try to keep your
(08:09):
budget within the price of oil and not taking too
much depth. And I think that in this situation Kathakhstan
can take a lot more financial pain than Saudi Arabia.
Speaker 4 (08:21):
This could be quite the standoff. It is a.
Speaker 3 (08:23):
Standoff, and so far what we are seeing is kataks
Stan so far is getting the pressure. Clearly they are
noticing it, but they are saying yeah, we hear you,
which almost sounds to me the same thing that a
teenager respond to their parents when their parents are asking
the teenager to clean their room. Yes, mother, I hear you,
(08:48):
and the room remains untidy for the next three months.
Speaker 1 (08:52):
That's one side of the untidy room. The other factor
in all of this when I'm thinking about prices is
the demand side. What is just briefly the current thinking
about what sort of effect the trade war and the
effects on growth could have on an oil demand.
Speaker 3 (09:05):
Before the trade war started, the consensus in the oil
market war that global oil demand was going to growth
about one percent, so that's roughly about a million borrows
a day, or to put it in equal terms to
an oil producer, we were going to need an Extralivia
in twenty twenty five. At the moment, everyone is reducing
those forecasts, and the range goes between the most optimistic
(09:29):
that they think that we're going to have an oil
demand of our around seven hundred thousand borrows a day
is thirty percent reduction in the forecast, to people that
they are beginning to think, well, this is really getting
very slow.
Speaker 4 (09:43):
The trade war remains unresolved.
Speaker 3 (09:45):
Yes, the Chinese and the Americans are talking, but they
are talking about talks, so probably this is going to
be worse, and they are expecting oil demand to slow
down to about three hundred to five hundred thousand boroughs
a day. Still everyone saw so far is talking about
a slowdown in the growth. We are not talking about
a contraction in oil demand, which we saw obviously during
(10:08):
the pandemic, but that was an unprecedented situation where everyone
was not traveling. But we saw a contraction in oil
demand back in two thousand and eight two thousand and
nine during the global financial crisis. So if the global
economy is slows down a lot, we may move from
a slow down in oil demand to an actual contraction, which,
together with Opek fighting internal dissidents, that could be a
(10:33):
recipe for much lower oil prices.
Speaker 1 (10:35):
Okay, heavier Plaspoomberg Opinion columnsts. Thank you very much, and
you can read Hava's latest work at Bloomberg dot com
Forward slash Opinion. For more explanations like this from our
team of three thousand journalists and analysts around the world,
go to Bloomberg dot com Forward Slash Explainers. I'm Stephen Carroll.
This is here's why. I'll be back next week with more.
Thanks for listening.
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