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IEA is wrong to blame Opec+ for global inflation

The latest spat seems to boil down to divergent views on China

Vietnam fuel storage Reuters/Drone Base
Vietnam will develop LNG terminals and associated LNG storage sites with an annual capacity of 20 million tonnes by 2030

The International Energy Agency has chosen to re-ignite a war of words with Opec+.

In its latest market report, the IEA accuses the group of oil producers of endangering the global economy with its “surprise” lowering of crude production to 1.16 million barrels per day announced on April 2.

The cuts “risk aggravating an expected oil supply deficit” in the second half of 2023 and “boosting oil prices at a time of heightened economic uncertainty, even as industrial activity slows in the world’s largest economies and production growth outside the alliance appears robust,” the IEA says.

Consumers are “under siege” from inflation, it adds, implying not too subtly that Opec+ is to blame for rising prices.

It’s not the first time that the two organisations have exchanged verbal blows recently. And I doubt it will be the last. The IEA broadly represents consumers although it has some big producers in its ranks too, like the US and Canada; while Opec+, led by Saudi Arabia and Russia, is the voice of the producers. 

Who can forget the “La La Land” barb thrown by Saudi energy minister Prince Abdulaziz Bin Salman after the IEA advanced the case for a halt to new hydrocarbon investment in 2021?

The producers believe that the IEA has been captured by the environmentalist lobby, to the detriment of its brief to protect the interests of all energy consumers.

The agency has certainly burnished its green credentials of late and is putting energy transition (ie, the shift away from hydrocarbons) at the centre of its strategic thinking.

The Opec+ side agrees on the need for measures to tackle global warming and accelerate the transition, but also believes that it is impossible to ditch hydrocarbons without endangering economic growth.

That is the background. But the cause of the latest spat seems to boil down to China, and divergent views of its economic growth prospects in the second half.

The IEA report forecasts world oil demand growth of 2 million bpd this year, “buoyed by a resurgent China”. Opec+ was even more bullish in its own monthly report, expecting 2.3 million bpd of growth for 2023, but was far more guarded in its outlook on China, which it seems to believe is difficult to call. Hence the cuts earlier this month. 

Opec+ is also more cautious on the global economic and financial outlook. It notes the mini-crisis in western banking systems in March, which some economists believe is the harbinger of more gloom to come, the ongoing threat of inflation, and the uncertain effects of measures led by the Federal Reserve to counter rising prices.

It does seem a bit rich to blame Opec+ for global inflation, as the IEA suggests.

The biggest single factor, most economists agree, is the unrestrained monetary policy of Western governments after the global financial crisis in 2008-09, compounded by the coronavirus-relief spending spree at the height of the pandemic.

Rising interest rates aimed at curing inflation have only added to the squeeze on consumers, at least in the short term.

Bloomberg recently calculated that each $5 on the price of crude oil adds a meagre 0.2 per cent to US inflation. That is barely a rounding error in the Fed’s scheme of things, and should be more than compensated by the increased revenue the huge US oil industry will receive from higher prices.

To match the inflationary effect of recent Fed rate rises – 50 basis points in a year – crude oil would have to jump to significantly over $200 a barrel. Nobody in their wildest nightmares believes this is likely.

While other energy commodities like gas and coal have touched all-time highs over the past year, crude oil prices are still significantly below where they were when Russian tanks were heading towards Kyiv in February last year. This is largely thanks to Opec+’s management of the global market.

There are some guilty parties out there, worthy of the IEA’s ire, in the failure to combat inflation and resulting economic damage – but Opec+ is the least of them.

Frank Kane is AGBI’s Editor-at-Large