The drop in oil prices that has followed the weekend OPEC meeting in Vienna is clearly good news for consumers in Asia, the largest and fastest-growing market.
After weeks of argument, the oil-producing countries agreed to increase output by up to 1 million barrels a day in an effort to cool a rally that has seen prices surge to their highest levels since 2014.
OPEC acted after widespread public debate about the price rises, with U.S. President Donald Trump himself intervening in the argument to lambast OPEC in two tweets that generated considerable attention.
But in all the discussion, the big Asian oil-importing countries that have such a significant presence in market failed -- not for the first time -- to make their voices heard. It is high time that China, India, Japan and South Korea, which together account for around 23% of global oil demand, play a more substantial role in the OPEC policy debate. Only India's oil minister, Dharmendra Pradhan, was in Vienna last week -- the lone voice of a major Asian consumer. None of the other three countries deemed it necessary to have a high-level representative in Vienna. While neither the U.S. nor big European countries sent ministers, it is not the West that needs to enhance its say. It is the Asian consumer nations.
Khalid al Falih, Saudi Arabia's energy minister, said on Sunday that an additional 1 million barrels a day would make their way around the world, with several hundred thousand barrels coming from the kingdom alone.
The Saudis presumably felt necessary to act when lobbied by Washington a few weeks ago to increase supply and cool down oil prices. Trump may be concerned by U.S. gasoline prices approaching a three-year high of $3 a gallon as the country enters its peak summer driving demand season. However, U.S. gasoline consumption remains robust amid strong economic growth and job market.
Emerging economies around the world, in contrast, are paying far more dearly for high oil prices. Rising domestic fuel consumption is necessitating rising imports of crude for most, causing a bigger drain of foreign exchange.
Asia was a relatively small consumer of oil compared with the U.S. and Europe until the turn of the century. The U.S., for long the world's largest oil consumer and dependent on growing imports from OPEC until its shale boom, historically exerted its influence in the Middle East and has continued to flex its muscle with OPEC when it deemed prices to be too high. Asian governments now have the clout of being a more important market for OPEC, but have yet to learn to assert themselves with the producers' organization.
OPEC is independent in how it makes its decisions. But it does not operate in a vacuum. Far from it. The fact that at least five of the major U.S. independent shale producers' CEOs were invited to present their views to the ministers in Vienna (though only two were able to attend) is OPEC's acknowledgement of the web of interdependencies between different parts of the oil ecosystem. Demand is half of the equation the producers' group is trying to balance.
It is time major oil-consuming countries established a formal forum for communicating with OPEC and major non-OPEC producer countries: an Organization of the Petroleum Importing Countries, or OPIC. The major emerging market economies of China and India should lead the charge. OPIC could also provide a platform to the relatively smaller but fast-growing oil consuming countries in Southeast Asia. In addition to regular and routine coordination, a producer-consumer dialogue before any meeting on production policy is critical to ensuring that OPEC hears its customers' points of view before making any decision.
Iran, Venezuela, Algeria and Libya have traditionally been the "price hawks" in OPEC's history. But now, two and a half years of economic hardship due to persistently weak oil prices between 2014 and 2016, followed by relief and recovery as crude regained its strength, appear to have turned more producers in the organization hawkish. They would rather see crude spiking toward $80 a barrel again than risk it slipping below $60 -- a level they would have welcomed just two years ago.
But emerging economies, especially those that unwound costly fuel subsidies and instituted oil pricing reforms over 2015 and 2016, hit their pain threshold as crude approached $80 in recent weeks. A strengthening U.S. dollar has dealt them a double whammy, weakening the purchasing power of their currencies. They are faced with a tough choice between bringing back fuel subsidies in some form, a clearly regressive move, or staying the course but opening the door to inflation and consumer anger. The danger is real as shown in recent protests including a crippling truckers' strike in Brazil and days of massive street demonstrations in Jordan.
OPEC as to brace for a tightrope walk in the coming months, as plummeting Venezuelan production, simmering issues in several other major producing countries, and U.S. sanctions against Iran's oil sector threaten to cause supply shocks. As an organization, it has pledged to keep the oil market balanced, not aim for progressively higher prices. But the onus is on the consuming nations to ensure they have as much of a say as the price hawks whenever a decision on modulating supply needs to be made.
Another important element of consuming countries finding their voice is the need for their policy-makers and bureaucrats to acquire oil market technical savvy and speak a language that resonates with the producers. Indian leaders continue to protest the "Asian premium," an old pricing policy of the Middle Eastern oil producers that resulted in importers in Asia paying much more than their European and American counterparts for crude purchased under long-term contracts. That premium withered away several years ago, but government
leaders unfamiliar with international oil pricing technicalities continue to flog the dead horse.
OPEC ministers routinely stress that they want prices that are "reasonable" for both the producer and the consumer. It is now up to the Asian consumers to ensure they convey their perspective on what is reasonable. Only the buyers can articulate to OPEC first-hand, their fuel subsidy dilemmas and the longer-term dangers of holding off on pricing reforms, their concerns over inflationary pressures on economic growth, and their projections of the impact of high oil prices on domestic demand growth. These are the dynamics OPEC needs to understand if it aspires to be a balancing agent in the global oil market.
Vandana Hari is founder of Vanda Insights, which tracks energy markets. She has two decades of experience providing essential intelligence on the energy commodities sector.