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Oil prices look set to rise sharply. Why and what does it mean for Irish motorists?

The collapse of OPEC talks this week could turbo-charge price increases.

Image: DPA/PA Images

A DIPLOMATIC ROW between two Arab nations taking place in Vienna might have implications for Irish motorists.

Based in the Austrian capital, the Organization of The Petroleum Exporting Countries (OPEC) has met over the past week or so to decide on a number of key issues that will go a long way towards determining the price of crude oil over the coming year or so.

Yesterday, those talks fell apart, raising concerns about the supply of oil to the market in August and beyond.

Before 9am today, US benchmark West Texas Intermediate crude for August delivery hit $76.98 per barrel, a level that was last seen in November 2014. The price pared back to around $75 later in the day, a three-year high.

Although some members of the cartel have expressed hope that fresh discussions can be tabled in the coming days, no date has been set.

“Clearly this is a worry,” says Paddy Comyn, Head of Communications at AA Ireland.

“With the possibility of increased prices at the pump, Ireland’s already beleaguered motorists will suffer another blow.”

Drivers have already been noticing price rises at the pump in recent months.

Global demand for crude oil has recovered as economies reopen and, in turn, Irish petrol and diesel prices have risen by 20.3% and 21.7% respectively since June 2020.

Those price pressures could be turbo-charged by the OPEC situation.

Unrealistic targets

At the centre of it all is a spat between cartel members Saudi Arabia and the United Arab Emirates.

Last year, faced with a collapse in demand for oil globally as governments locked down at the outset of the Covid-19 pandemic, OPEC agreed to cut oil production in a bid to stabilise prices.

The plan was to remove about 9.7 billion barrels of oil per day from the market and then gradually re-introduce an extra 400,000 barrels per day each month from August 2021 to December.

It should add up to an extra two million barrels hitting the market by the end of the year.

Oil supply would then return to pre-pandemic levels by the end of April 2022.

So far, the plan has worked with the two leading oil contracts, North Sea Brent Crude and West Texas Intermediate, hovering around a three-year high in recent days at $75 per barrel. 

But OPEC members have struggled to ramp production back up to where it needs to be and the April 2022 deadline is seen by most as unrealistic.

And so cartel members agreed last week to extend some of the production cuts until December 2022.

The UAE rejected this proposal.

Why, exactly? Because under the cartel’s rules, each OPEC country has a specific quota of oil it’s allowed to pump derived from its own baseline production level.

What Abu Dhabi wants, in essence, is its baseline level to be increased to reflect improvements in its production capacities. That would allow the UAE to pump more oil.

The UAE is currently allowed to pump 3.17 million barrels per day. However, having invested heavily in production, the country can now pump 3.8 million per day it says.

But baselines are only up for renegotiation when the current deal ends.

Because Saudi Arabia and Russia want to extend the agreement, it could be next year before the UAE can get what it wants.

Unhappy to wait that long and arguing that the old baselines are out of date, Abu Dhabi has put its foot down over the past week or so.

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Speaking on US television over the weekend, UAE energy minister Suhail Al Mazrouei said that his country has “sacrificed the most, making one-third of our production idle for two years”.

“We can’t make a new agreement under the same conditions – we have a sovereign right to negotiate that,” he said.

Supply question

The trouble is without agreement between the cartel members, that extra 400,000 barrels won’t hit the market in August as planned.

Fewer barrels could mean higher energy prices, bad news for economies that are that only beginning to regain some of their pre-pandemic lustre and adding to concerns about rising inflation.

In the medium term, the row could spark a price war between OPEC members, which could ultimately lead to a collapse in prices.

But for the moment, price pressures are trending upwards with the market now expected to receive fewer barrels than expected in the second half of the year.

The potential for a knock-on effect for motorists is clear, Comyn says.

“Generally speaking, it can take up to two weeks for changes in crude oil prices to be reflected at the pumps, so as long as oil continues to climb, we should prepare for fuel prices to do the same,” Comyn explained.

The OPEC talks were aimed at avoiding “a situation where we could see three-digit prices for oil, which inevitably would have a significant knock-on effect here”, he said.

On the positive side, Comyn added, “This might further accelerate the move to electric vehicles.”

“However, we would continue to urge the government to give clarity on the future of grants for this growing sector.”

Additional reporting by AFP

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