Stabilize the oil market

An oil pump in operation.LARRY W. SMITH / EFE

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• Saudi Arabia and the United Arab Emirates put their differences aside and oil production will increase from August

The agreement reached yesterday within the expanded OPEC group (which includes important players such as Russia) to increase oil production is positive news, because it offers stability to a market that was going through a turbulent cycle, first marked by a brutal war of prices between Russia and Saudi Arabia —which caused strong volatility in financial markets, pushing the price of some oil delivery contracts to negative territory for the first time in history— and subsequently due to a sharp rise in prices. After suffering a disaster due to the collapse of demand with the explosion of the pandemic at the beginning of 2020, the price of the reference barrel in Europe - Brent - has not stopped rising in the last year: after reaching 30 euros per barrel last summer, and exceed 50 at the beginning of the year,in recent weeks it has been persistently above 60 euros. It is one of the factors that has contributed to an increase in inflation that worries, among others, the European Union.

The pact foresees an increase in production by some 400,000 barrels per day from August —something less than expected in the near future—, with other jumps of the same size in the following months to reach an increase of two million daily added at the end of year. The modest pace of the agreed production expansion indicates that expanded OPEC is comfortable in the current price scenario and does not trust a strong rise in demand due to doubts about the intensity of the recovery. It is not, therefore, a turnaround that allows us to glimpse a substantial drop in prices and a consistent positive effect on inflation.

Inflation is not the only risk associated with rising oil prices. As was the case in the previous financial crisis, when the price of a barrel rebounded at an accelerated rate since the beginning of 2009 - long before the world economy did - the rise in energy prices can act as a vector that makes energy consumption more asymmetric exit from the crisis. Then the European economies suffered a second relapse that other regions avoided instead. Economic indicators now show that industrial activity is recovering faster than services, such as tourism, where social distancing measures due to the pandemic have a much higher incidence. The countries where the service sector has more weight, and those with a high external dependence on crude oil and other fuels,they could post a weaker economic recovery. Unfortunately, Spain is among the most exposed countries on both fronts.

In the longer term, it must be taken into account that the energy transition will entail, at least during a transitory period, a rise in energy prices so that industry and consumers internalize the environmental effects of their decisions. Public authorities have the responsibility to protect the most vulnerable consumers in this phase, preventing climate policies from accentuating inequalities, but they must not dilute the most difficult decisions. When these come to fruition, there will not only be an environmental benefit, but also a great geopolitical shift, in which the fall in demand for crude will greatly affect producers, including many authoritarian regimes.