The penguins at Ski Dubai may be concerned for their relatives living on Antarctica's Heard and McDonald Islands. With no human inhabitants, these island penguins are under 10 per cent tariffs amid the US's latest sweep of retaliatory taxes that have caused waves around the world.
While these helpless penguins might bob and weave to find a response to the sudden and unexpected tax measures, Opec has been taking the early bird advantage with actions that might make it a winner in the first shots of a trade war.
That might appear to be a strange conclusion when Brent crude closed the week down $9.49 per barrel in two days of chaotic news and trading. Oil exporters’ organisation has struck back against over-producers within its ranks and competitors outside.
President Donald Trump’s tariffs, announced on Wednesday, exempted oil and gas. Nevertheless, they had a crushing impact on oil markets, which plummeted even as the measures were unveiled.
Traders feared a slowdown in the US, still the world’s biggest oil consumer. JP Morgan, for instance, cut estimates for economic growth, hit by earlier uncertainty, from 1.3 per cent to a contraction of 0.3 per cent.
Even more, they worried over the impact of the heavy levies on China and the other emerging Asian oil importers, who account for 60 per cent of estimated demand growth this year.
Total American tariffs on China now amount to 54 per cent; 46 per cent on emerging export powerhouse Vietnam, 37 per cent on Bangladesh and Thailand, 32 per cent on Indonesia and Taiwan, 27 per cent on India, 24 per cent on Malaysia.
After all was said and done, JP Morgan raised its estimate of the chance of a global recession this year to 60 per cent, from 40 per cent.
Several petroleum exporters are hard-hit. Iraq at 39 per cent, for example – but since almost their only export to the US is exempt oil, they should not be immediately affected. All the GCC states, along with, oddly, Iran, face only the basic 10 per cent levy.
Just a few hours after the tariff bombshell, Opec+’s scheduled online conclave unleashed a surprise of its own. Instead of rubber-stamping another monthly increase of 138,000 barrels per day, as it did last month and as expected again, it crammed three into one. Allowable production levels for the eight countries involved in voluntary cuts will rise by 411,000 barrels a day.
Some arm-twisting had gone on in the run-up to the decision. Unhappy for a while with under-compliance by Iraq and Kazakhstan in particular, the core decision-makers in Opec+ had signalled that it was time to shape up. The April increase came along with a schedule of compensation cuts, to make up for past over-production, which would have seen actual group production falling for a few months before rising again.
Kazakhstan replaced its energy minister last month, after he went to the US to meet the foreign oil companies operating in-country to discuss reducing their production.
Output is booming because of expansion of the Tengiz field. National production reached 1.76 million barrels per day in February, while the Kazakh energy strategy targets 2.11 million barrels per day by 2027, well above the March allowable level of 1.468 million bpd.
Most of landlocked Kazakhstan’s oil is exported using the CPC pipeline that runs through Russia to Novorossiysk on the Black Sea. On 1 April, Russia closed two of the three loading points used by Kazakhstan, complaining of unspecified “violations” after a safety inspection. Comments have suggested the repair work could take more than a month, which would force Astana to cut back production sharply.
The pipeline was also hit by a Ukrainian drone attack in February. It was set to carry about 1.7 million barrels a day this month, which could be halved if the berths are kept out of action.
A Russian court ruled on Friday that the terminal should be reopened – apparently a win for Kazakhstan, but in reality, a successful exertion of pressure by Moscow to warn the Kazakhs of the consequences of non-compliance.
Iraq is the other problem. It is under severe US pressure to resolve the dispute with the semi-autonomous Kurdistan region over resuming oil exports through Turkey. But higher Kurdish production would swell Iraqi over-production yet further. The country also has major production expansion projects under way, including the Ratawi field led by TotalEnergies, and the recent return of BP to the Kirkuk area.
And, starved of Iranian gas, it will have to burn more oil in its power plants to keep the electricity grid functional this summer. Lower oil prices threaten Baghdad’s finances, as it already runs a hefty deficit.
So the move by Opec+ has three effects. It warns the under-complying countries that they need to fall in line, or output could rise much more and prices fall. It gives them some wriggle room to meet their promised compensation cuts, by raising their baseline. And it redistributes the extra production to the states that have been bearing the bulk of the burden, namely Saudi Arabia and the UAE.
The other target for Opec+’s action is reeling from a self-inflicted wound. Mr Trump came into office promising deregulation to promote “energy dominance”. The continuing growth of US oil had kept it as the main competitor to Opec+. It was already slowing down because of industry consolidation, shareholder pressure and maturing reservoirs.
Now the US shale industry faces lower selling prices, retaliatory Chinese measures that will effectively shut out American oil exports entirely, and higher costs for key items such as drill-pipe because of tariffs.
Exempting oil from the new levies is a bad move for the US upstream industry, which has to compete with imported petroleum. Saudi Arabia and Iraq are two of the biggest suppliers. The White House, which had pressed for higher Opec+ output and wants more output to fill in a possible gap from tighter sanctions on Iran, cannot really complain.
Opec+ has made a smart, aggressive move while staying out of the US’s firing line. Bullying penguins is one thing; the oil exporters’ organisation has shown it can look after itself.
