More Political Instability in South America

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Political instability has reared its head in another South American nation this week. On Tuesday, Ecuadorian President Lenin Moreno announced a multi-billion dollar fiscal reform package which would eliminate fuel subsidies. This would raise the price of gasoline and diesel dramatically, perhaps even doubling it in some instances. Yesterday, as soon as the new fuel prices went into effect, the protests began in Ecuador’s capital city Quito, and its largest city of Guayaquil. A nationwide transportation strike was also called. Protesters blocked streets, burned tires and fought with police through the day. Moreno declared a state of emergency to ‘avoid chaos,’ and it went into effect last night.

He added that there is no chance his government will change policies now, “especially those related to a perverse subsidy that was causing harm to the country.” Government sources claim 275 protesters were arrested and 28 police officers suffered injuries.

Ecuador is currently struggling with a high level of public debt. The fiscal reform package is part of Moreno’s austerity policies. Many Ecuadorians believe the policies are the result of a $4 Billion loan agreement with the International Monetary Fund. Moreno has also announced that Ecuador will be leaving OPEC in January, 2020. This move allows the nation to increase its oil production and exports beyond the cartel’s imposed limits. Ecuador’s exit will not cause a shakeup in the world oil market given that it is OPEC’s smallest member in terms of oil production.

Crude Politics

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Saudi Arabia and the United Arab Emirates are spearheading an OPEC effort to extend oil cooperation with Russia for at least three years and perhaps longer. OPEC and Russia have been cooperating closely over the past two years. Initially, the ad hoc partnership was intended to support oil prices which were experiencing a dramatic plunge at the time. This transformed into a market-control push to curb the influence of the United States as top crude producer in the world. As the US position has risen, its ability to affect international markets, and oil prices has grown.

Russia has rejected earlier efforts by OPEC to make it a permanent member of the cartel. Russian officials have pointed to increased bureaucracy as the reason for remaining outside of OPEC. There may be some truth to this, but the main reason for Moscow’s reluctance is probably the fact that Russia is not as dependent on oil revenue as many of OPEC’s other members. Therefore, it can survive economically even with oil prices remaining low. Geopolitics is probably another factor in Russia’s decision. Iran is a close ally of Russia, as well as the archenemy of Saudi Arabia. Tehran would not want to see a situation develop where Saudi Arabia and Russia as economic allies.

Other OPEC members may not be as open to Russia joining the cartel either. Russia and Saudi Arabia are the world’s #2 and #3 oil producers respectively. Those two nations would effectively hold the decision-making power for the entire cartel, marginalizing the smaller nations, their contributions, and positions. The Saudis also need to carefully consider the ramifications it could potentially face in the future if its efforts to woo Russia are successful. It could strain relations with the United States at a point in time when the House of Saud is enjoying a close, fruitful relationship with the Trump administration. In the aftermath of the Khashoggi affair the Saudis need to be a little more thankful to the US for its support. Bringing Russia into OPEC would not be seen as the act of a grateful ally.

Monday 18 April, 2016 Update: Doha Fails To Mend Oil Markets

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Over the weekend, talks in Doha between the world’s largest oil producers ended without an agreement to limit production and supplies. Oil ministers from 16 nations came together in an effort to stabilize the global market. The roadblock in the discussions was Saudi Arabia and other Gulf nations refusal to agree on a deal unless all OPEC members joined in agreement.  The Saudis have stated that they will not restrain production until there are commitments from the other major producing nations. This statement was aimed directly at Iran, which did not attend the meeting and has ruled out limiting its oil production until the levels return to what they had been before Western sanctions were imposed. It is obvious that the chances for a deal have fallen victim to the geopolitical conflict between Saudi Arabia and Iran.

While the Doha talks have failed to bring about a path towards ending the global oil glut, an oil-worker strike in Kuwait is making headway in that direction. Short term at least. The labor strike has cut Kuwait’s oil output by upwards of 60%. That means 1.7 million fewer barrels of oil will be making it onto the world market, drying up the surplus that has been there since the start of the year. The strike will provide short term relief and might temporarily re-stabilize the oil market However, it is by no means a permanent solution.

More updates and analysis on the oil situation, Iran and Saudi Arabia will come later in the week.