Five reasons for the failure of any global agreement to support oil prices

Jason Boardoff, a former National Security Council official and special assistant to former President Barack Obama, wrote an article in the American journal Foreign Policy about the possibility of high oil prices.

The magazine said that even if the United States, Saudi Arabia and Russia reached a historic agreement to cooperate to support oil prices, any respite for the oil industry would be short-lived.

The author listed the following reasons:

First, there is no effective mechanism for many countries to work together to reduce production.

Instead, the oil producing and consuming countries formed two different organizations.

After the shock of the Arab oil embargo in 1973, the major oil consuming countries formed the International Energy Agency and agreed to maintain emergency oil stocks.

Today, the agency includes countries such as India and China.

As for oil producers, they have the “OPEC” organization, which has also developed through cooperation with non-member countries such as Russia.

Nevertheless, many of the major producers outside OPEC, the most important of which is the United States, which now finds itself in a unique position in terms of being the world’s largest oil producer and largest consumer, still lacks an effective forum for dialogue with other producers.

The G20, which includes the United States, Saudi Arabia, and Russia, may seem a good place for major producers to issue a historic declaration of cooperation today, but as an organization that includes oil consumers with divergent interests, the G20 is not suitable for this.

Second: Even if there is a forum that brings together the main oil producers to negotiate production levels, the United States has little to offer at the negotiating table because the federal government does not directly control the amount of oil produced by the country.

Third: The American oil sector will reduce production, whether or not the government requires it.

American production is expected to drop by at least one million barrels per day by the end of 2020 and possibly by a much larger amount next year if prices remain low.

Shell oil also differs because it has a short production cycle – as production can drop faster than traditionally produced oil.

Fourth, diplomacy remains an effective tool to encourage Saudi Arabia and Russia to push other countries toward production cuts.

In the past, US presidents have called on Saudi Arabia to stabilize oil prices during crises and have often responded (during Hurricane Katrina or the Libyan Civil War, for example).

Saudi Arabia is the only country that maintains spare capacity – at great cost – which gives it an exceptional capacity for geopolitical influence.

But given the importance of the United States’ support for Riyadh, threats by Congress may also be effective.

Oil diplomacy between the United States and Russia is complicated by US sanctions, but Trump may seek to combine a carrot to ease sanctions with an additional sanctions stick to urge Russia to help support prices.

Fifth, there are better tools to manage collateral damage from lower oil prices, as the next round of economic incentives must include additional assistance for workers, US states, and municipalities affected by the economic downturn.

In the long term, policymakers should do more to help oil-producing regions manage their dependence on volatile revenues from the shale oil sector for public spending, including on schools and infrastructure.

More importantly, instead of just scrambling in response to the immediate crisis, policymakers must take long-term steps to reduce US exposure to inevitable fluctuations in oil prices – and to reduce carbon dioxide emissions – by reducing oil consumption.

Unfortunately, while the White House was calling on Saudi Arabia to help save the American oil industry, it was backing away from the fuel economy standards that would have helped America reduce dependence on oil.