The Economist UK - 16.11.2019

The EconomistNovember 16th 2019 Finance & economics 67

2

1

Russia was supposed to help opecmove

into a new era. But the starting point from

which it agreed to cut production was

unusually high—and output this year has

exceeded its quota even so. The country’s

oil industry “is really chafing under these

production cuts”, says Aaron Brady of ihs

Markit, a data and research firm. The result

is that Russia’s average daily production so

far in 2019, after the opecdeal to lower out-

put, is higher than the average in 2018, be-

fore the deal was struck. Saudi Arabia has

adjusted accordingly. In July and August,

for instance, the kingdom cut output by

more than twice the amount required by

last year’s agreement.

But such efforts have proved insuffi-

cient to lift oil prices. On the face of it, they

should have been buoyant. American sanc-

tions have clamped down on exports from

Venezuela and Iran, respectively the pos-

sessors of the world’s largest and fourth-

largest proved oil reserves. Tankers have

been seized in the Gulf. Iraq, opec’s sec-

ond-largest producer, is at risk of being en-

gulfed by protests. Most notably, in Sep-

tember a drone attack knocked out more

than half of Saudi Arabia’s production. The

loss was more severe than that caused by

the Iranian revolution in 1979 or Iraq’s inva-

sion of Kuwait in 1990. 

Yet oil markets have shrugged it all off.

“In the past such geopolitical tensions gave

a boost to oil prices,” says Fatih Birol, the

head of the iea. The price of Brent crude

has subsided from a high of nearly $75 in

April to around $60 today. 

One reason is that America’s frackers

have continued to pump more oil. The

country’s daily output in September was

12% above last year’s average. It is also be-

cause economic growth has slowed, with

oil demand suffering not just in Japan but

in India and South-East Asia, where it was

expected to grow strongly.

Next year economic growth may tick up.

Investors are pressing American shale

companies to reduce spending and boost

profits. That would result in flatter produc-

tion and, in turn, help nudge prices higher.

But new supply elsewhere looks set to

push prices in the other direction. Exxon-

Mobil is ramping up production off the

coast of Guyana. Brazil’s attempt to auction

new offshore leases this month was a fail-

ure—supermajors, such as ExxonMobil

and bp, declined to bid. Yet investments al-

ready made offshore mean that by 2021 Bra-

zil’s crude production may be 18% higher

than this year, according to ihs Markit. 

Norway will also see a surge in output.

Notwithstanding its announcement in Oc-

tober that its sovereign-wealth fund would

sell its holdings in oil exploration and pro-

duction companies, the country itself is ex-

pected to increase production markedly in

the coming years. Its state-backed energy

giant, Equinor, said in October that Johan

Sverdrup, a giant new oilfield in the North

Sea, had begun producing crude. 

The broadened opecalliance must now

decide whether to hold at the reductions

agreed to last year, or to cut harder. The cur-

rent arrangement may be insufficient to

keep Brent crude above $60 a barrel. Yet

there may be little appetite for dramatically

lower production targets.

Aramco, Saudi Arabia’s state-backed oil

company, plans to list some of its shares in

mid-December, shortly after opec’s meet-

ing. Any agreement for a big cut in the king-

dom’s output would lower estimates for

Aramco’s earnings, which would suppress

its valuation, points out Neil Beveridge of

Bernstein. On the other hand, he says, “the

worst thing that could happen to Aramco

would be to see the listing go ahead and see

the oil price collapse.” This has been a dra-

matic year on oil markets. December could

bring further plot twists.  7

Oil to play for

Sources: Bloomberg; IEA

Brent crude-oil price, $ per barrel

1918161412102008

150

100

50

0

Global oil demand, % change on a year earlier

18161412102008

4

2

0

-2

Ramping up

“Y

ou would need a magic wand to

bring back manufacturing jobs,” said

President Donald Trump on November

12th, quoting someone from a past admin-

istration. “Well, we brought them back.”

The world’s carmakers could be forgiven

for wishing he had not bothered. They have

been thwacked with tariffs on steel, alumi-

nium and components from China, and

threatened with broader levies on cars and

car parts in the name of national security. A

tariff deadline was looming as The Econo-

mistwent to press. And they have new rules

of the road, in the form of the usmca, a

trade deal with Mexico and Canada.

But despite being pressed to bulk up

their American manufacturing presence,

there is little sign so far that foreign car-

makers are leading an American invest-

ment boom. According to Kristin Dziczek

of the Centre for Automotive Research,

their investments in American facilities

have been fairly steady since the recession.

Meanwhile the value of American im-

ports of passenger vehicles and light trucks

continues to grow, by 6% in the first three

quarters of 2019 compared with a year earli-

er. Though European car executives were

hauled in for a meeting with Mr Trump last

December to discuss their American pro-

duction plans, the value of imported vehi-

cles from the European Union rose over the

same period by 2%.

The trade data may be distorted by

stockpiling: in its third-quarter earnings

call Volkswagen, a big European carmaker,

mentioned this as a defence against threat-

ened tariffs. And Ms Dziczek cautions that

trade policies are just one of many consid-

erations when companies are deciding

where to locate new plants. American de-

mand for cars is sagging, and production is

shifting from saloon cars to other larger ve-

hicles such as suvs, as well as electric cars.

Behind the scenes, however, car compa-

nies are planning to rework their supply

chains to meet the usmca’s stricter content

requirements. Ann Wilson of the Motor

and Equipment Manufacturers’ Associa-

tion, an industry group, says members are

drawing up plans to manufacture more in

America. “You will see structural changes,”

says Dietmar Ostermann, who works with

car companies at pwc, an accountancy.

Plans are being hatched but have not yet

been executed, he says. Plants in Mexico

owned by international carmakers have

the most changes to make.

WASHINGTON, DC

The Trump administration is trying to

reforge carmakers’ supply chains 

American trade policy

Parked