The price of oil has had a wild ride this week after the failure of the Doha talks last weekend to agree even a joint communique, let alone a production freeze.
But regardless of the outcome of that meeting the outlook for oil is bearish over the long term according to PIMCO’s Greg Sharenow, portfolio manager and former Goldman Sachs senior energy economist.
Sharenow says that because the supply-demand imbalance in crude oil is structural in nature, cutting production would end up being “self-defeating” for OPEC members. Such a move would support prices which in turn would mean OPEC “would be subsidizing investment in supplies and discouraging consumption”.
That’s what they tried to do in the 1980’s, Sharenow said, and all it achieved was “low prices for a long time as excess supply capacity took more than a decade to work off.”
Sharenow says the “next national thing” OPEC members should do is actually invest in the infrastructure that will allow them to increase production. That he says would “increase investment dollars to replace lost revenue from oil sales and create a future income stream once investment comes to fruition”.
That sounds a lot like the plan – threat – that Saudi Crown Prince Mohammed bin Salman articulated last week when he told Bloomberg that his country could flood the world with oil if they choose to.
Sharenow says doing this, what he calls opening up to foreign oil investment, was to Venezuela’s benefit in the last 1980’s and through the 1990’s and he notes Mexico is currently opening its oil industry. Whether or not other nations “have the political flexibility to effectuate an opening,” is an open question.
But Sharenow says ultimately in opening up, the short term fix to economic activity has in itself “bearish implications for oil prices” over the long run.
Put in this light maybe the Saudis scuppering prospects of a deal might have been the right call. No wonder oil has rallied instead of falling as many expected.