Energy economics is a critical field that examines the way energy resources are produced, processed, distributed, and consumed, and of course, its implications for global markets, national security of countries, and environmental sustainability. Understanding the interplay between energy economics and energy security, availability has always been important, however, as we move forward, the interplay between different forces driving the markets becomes more intriguing and perplexing. This is particularly vital when it comes to oil prices. International oil prices have historically shaped the geopolitical landscapes.
Energy Economics encompasses various aspects of energy resources. During the last half a decade, to be precise, after COVID-19, energy markets in general and oil prices, in particular, have shifted from production aspects to the financial side of the supply chain. OPEC+ has kept some five and a half million barrels of crude capacity out of the market, but oil prices have not stabilized at a desirable range. Given the diverse sources of energy in recent years and impactful moves towards a new era of energy production and consumption mix, markets seem to require more time to adjust to the existing energy environment.
Externalities and Sustainability
Externalities related to energy production and consumption, such as carbon emissions and environmental degradation, play a significant role in shaping regulatory frameworks and market opportunities and or challenges in energy economics. Advances in technology significantly impact energy production and consumption patterns. Emerging renewable sources of energy, battery storage, and CCS will influence energy transition in the coming years. However, technological advances do not necessarily limit the sphere of new sources of energy. Advancements in technologies can well occur in traditional energy sources, including oil and gas. The current narratives suggest that technological advances are not limited to non-fossil fuels.
I would argue that with the passage of time and the emergence of new sources of energy, older types of energy do not end and do not even diminish in volume. As the US Energy Administration suggested in a 2023 annual report, today, the world consumes more coal than in the 19th and 20th centuries. As such, there’s nothing called transition when it comes to the sphere of energy. I believe this to be a misleading externality imposed on the smooth flow of a safe and affordable supply of energy to the entire world.
Fractured Energy Trend
We need to note that the current energy trends and oil and gas, in particular, are so fractured and overwhelmed by uncertainty that it is difficult to predict how different stakeholders will position themselves in a meaningful relationship. In the United States, the current administration calls for maximum oil production. The US produced 13.3 mb/d of oil, the highest in the US and anywhere in the world. The incumbent of the White House is boosting to reach 16 mb/d by the end of the decade. Given the fact that almost the entire of additional barrels must come from shale reserves, one should expect that the price of oil should remain stable and above $70 per barrel so that the oil companies would envisage investing in new shale ventures.
On the other hand, President Trump has re-emphasized his willingness to lower oil prices so that the American drivers will be happy with his policies. Lower oil prices contradict his vision of higher oil production. This is particularly important when the new US president has already started to levy new tariffs on imported goods from Canada and Mexico, where some 3.4 mb/d of oil is imported. How the government can cope with the dilemma is not known yet. US voters have indicated their willingness and preference for more accessible energies and more emphatically on gasoline.
US Tariffs
The US government’s emphasis on tariffs on oil and products imports from different countries will lead to higher energy prices for final consumers. Tariffs on energy imports, as well as all other commodities, will eventually increase general consumer prices. The government intends to raise the employees’ efficiency and limit the number of Federal government personnel. The government also aims at cutting taxes.
However, the imposition of tariffs eventually leads to the supply disruption. Investments in renewable sources of energy can also be disrupted owing to the imposition of tariffs on imported equipment and rare minerals from countries like China, Russia, Canada, and some important members of BRICS that are already on the path to defining their roles and policies away from the United States.
Tariffs will also impact specific sectors of the energy spectrum. The United States is currently producing 6.8 mb/d of oil from fracking and shale oil. Shale oil is a very light crude and cannot be refined by most of the refineries in America. It has to be blended with heavy grades of crude from countries that are produced in countries such as the Middle East and Venezuela. Tariffs on crude imports raise the refining costs in the US by a certain margin.
It is fair to say that tariff against a specific product from a specific country is virtually a sanction imposed on that country. The US administration has been working on the reintroduction of tariffs on most goods and countries. After the emergence of the WTO, tariffs were considered something of the past. When the United States begins implementing tariffs on goods and services from other countries, those countries will likely retaliate. This would mean the end of an era. The world economy will enter the trump-land.
Evolving Energy Policies
The new stakeholders in the new US administration began their campaign with an isolationist slogan. Nonetheless, for a country the size of America and with $35 Trillion dollars of international debt, isolation is irrelevant. In a country whose currency is the world reserve money, isolation may mean a much more impactful influence. A divergent energy policy among major consumers and producers will eventually lead to a wider divide and divergence.
Eurozone’s powerful economies, that is, Germany and France and the rest of Europe for that matter, relied on cheap, abundant Russian gas pipelines for some half a century. China was the factory of Europe and supplied parts for the EU manufacturing and machine building sector. Now, both those venues are shut down. Europe is helpless and seems to be getting ready to say goodbye to the future.
Asia is moving fast forward with China and India in front.
International oil markets have been under several geopolitical crises since 2022. War in Ukraine, growing tensions and conflicts in the Middle East, and near-war situations in sensitive areas have had limited impacts on market behaviors. This is exacerbated by the Chinese slowdown and the signs that the Chinese engine of world demand growth is shut off almost permanently.
US unilateral exit from the United Nations climate change treaty is an indication that the United States will evade any international pressure to abide by the COP decisions. This will embolden other countries to evade climate obligations. This is considered good news for all other oil producers. Investors need a long-term perspective to make investment decisions. On the other hand, as mentioned earlier, Trump wants prices low enough for the US economy and consumers.
Oil producers, in general, and OPEC+, in particular, are contemplating the optimum price of oil for the US both to survive investment and to avoid inflationary pressures. OPEC+ wants to test Peak-Trump price bands. Based on market sentiments and Trump, the peak price is in the range of $70 to $75 for WTI. Nevertheless, aside from sentiments, market fundamentals suggest the price band of $75-80 per barrel for Brent.
To the best of my knowledge, many market watchers overestimate the OPEC plus 6 mb/d of excess capacity. I believe that the figure is exaggerated. OPEC alliance will probably bring up something like 3.00 to 3.7 million barrels of additional barrels to the market once they decide to change policy in April or after. Most of the so-called 6 million barrels of excess capacity are either already in the market, or it’s not there at all.
Market New Dominance
President Trump’s dominance of market headlines should not obscure the shifting tectonic venue outside the US, where outside political and economic powers are fully aligned with each other for a more powerful front. In Asia and Eurasia, regional groupings and evaluating options to counter the so-called US isolationist instance. Once the current US administration insists and virtually imposes tariffs on imported goods and services from Europe, the continent will be more at ease to move its trade and economy towards Eurasia. After the war in Ukraine and the termination of gas flow from Russia, Eurozone countries began to import LNG from the United States at around four times the price they paid for the Russian gas. In the meantime, many European companies and manufacturers moved their operations to the United States, Canada, and Mexico, where energy is abundant and cheap and political stability persisted. This is what Trump wants, with the exception that America’s first policy must be followed by Europe, too. That is avoiding Canada and Mexico or accepting tariffs.
Shifting Geopolitical Chessboard
Washington has not yet digested the new geopolitical landscape of the world and the Middle East. Trump is going to pressure the OPEC alliance to release oil. The current global oil market owes its stability to the OPEC alliance. A market with no excess capacity would be in panic. The oil market requires surveillance with excess capacity.
It has to be noted that the Middle East has largely been starved of necessary investments. It has been repeatedly reported that Middle Eastern countries need an additional $700-800 billion to maintain and boost capacity. Anti-fossil fuels campaign by certain political parties in Europe dis-intensified international oil and gas companies from investing in the Middle East.
As such, the current alliance of OPEC and non-OPEC producers is not a temporary phenomenon. It’s lasting and won’t be impacted by the political climate in Washington. In the meantime, Russia cannot win back major international oil and gas companies that helped boost Russia’s oil and gas production greatly. This would mean that the countries in the South, which are the main producers and consumers of oil and gas, need to join hands to formulate regional alliances.
Global oil markets will not witness a prosperous year in 2025. Even with no political pressure from the US, the OPEC alliance has to stay away from officially abandoning the 2023 quotas arrangement. However, once the war in Ukraine ends and the US lifts the current price cap on Russian oil exports, Moscow may be tempted to export more than its current quota. It may be noted that Russia has a complicated system for calculating its production and exports of crude oil.
In case Russia is tempted to deviate from its current data reporting and quota allocation within the OPEC plus, a volume share war may erupt. Once one major group member violates the quotas, other countries with additional production capacity tend to maximize production. A market share battle is always devastating for the global oil market. This can lead to a confrontation and bring down the price to a much lower level. A market share war was experienced during the 1980s. Back then, oil prices fell below $10 per barrel and some months of the year to as low as $7 per barrel.
Shale Prices
Under such a scenario, shale oil prices would crash, too, and the US oil production would not survive the pressure. Back in 2023, one Saudi Arabia official suggested that the International Oil Majors should join in a sort of quota arrangement to help stabilize the global oil markets.
In conclusion, given the circumstances, it is difficult to make a market prediction for the entire 2025. However, for the first quarter of the year, the market remains cautiously bearish. When OPEC+ ministers meet on 1 April this year to decide the new quota and ceiling, they will have tough choices. Hopefully, Maximum Trump will recede, and the alliance will have a clearer picture of the world oil market and the global economy.
Fereydoun Barkeshli
Energy Market Analyst
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