Faced with intense budgetary pressures, oil producers are itching to open the taps — albeit gradually. The Organisation of Petroleum Exporting Countries (Opec) and its allies, known as the Opec Plus, agreed last Wednesday to bring down their output cut from 9.7 million barrels per day (bpd) to 7.7m bpd, effective August 1.

With the gradual opening up of the world, there seems a ray of hope among the producers about crude demand recovery. This is despite the overhanging possibility of a second wave of the Covid-19 pandemic. In view of the daunting budgetary deficit, Opec Plus preferred to overlook the possibility, taking instead an illusionary course.

The fact, however, is that the producers are sitting in a bubble. The overall math is simply not adding up.

There are many ifs and buts to the overall scenario. The producers are keen to open the taps. Yes, they have only a few options available. But the numbers, they are banking upon, is not taking into consideration the absurd realities of the crude markets.

Opec and its allies are currently making decisions in an uneven playing field, as a number of important crude producers are either faced with an embargo or are in the midst of civil strife.

Iran, Venezuela, and Libya are three distinct examples. They are out of the current crude equation. But even their absence from the markets has not made the lives of other producers much easy. They had to cut their output to unprecedented levels. What if the above three return back to markets, which one day or the other they would?

Let’s get the math clear. Iranian output is at its lowest level in four decades. It was as low as 1.9m bpd in June, according to a Reuters Opec survey. That was almost half of Tehran’s production in 2018 and the lowest level since 1981, the beginning of Iran’s war with Iraq and attacks on its oil facilities, according to the Opec data.

Iranian exports have also fallen to new lows as an oversupplied market and the coronavirus pandemic has made it harder for Tehran to find customers willing to take its sanctions-hit oil.

Iranian crude exports were about 100,000 bpd in May and 237,000 bpd in June, as per Kpler, and approximately 210,000 bpd according to FGE. This was a fraction of the more than 2.5m bpd that Iran exported in April 2018. The impact of the embargo on Iran has taken out some 2-3m bpd in crude output from the markets.

In normal circumstances, Iranian production capacity could even go higher. In 2008 Iran was producing 3.9m bpd. The same year it exported 2.4m bpd. A paucity of funds and a lack of access to technology have impeded the growth of the Iranian energy industry significantly. Today its growth stands restrained. In the meantime, its crude exports are almost on the verge of touching zero.

Venezuela is another example under the hammer. The country exported some 780,000 bpd in July 2019. Yet, under continued political and economic pressures from Washington, Venezuela’s output has pummeled to 393,000 bpd in June, down from 573,000 bpd in May and down 52 per cent from an average of 821,000 bpd in the first quarter of the year. And, Washington seems determined to bring the number to zero. The June output was the lowest monthly total since February 1943, when Venezuela’s nascent oil industry produced 353,000 bpd.

The ongoing civil war in Libya has also taken off an additional 1m bpd from the markets.

Production in war-torn Libya plunged to just 100,000 bpd compared to 1.2m bpd before the eruption of the civil war. During the Gaddafi era, the Libyan output was exceeding 1.6m bpd.

Since withdrawing from the Iran nuclear deal in 2018 and opting to put sanctions on Venezuela in early 2019, the Trump administration has effectively stifled some 4m bpd of oil production from the two countries. Add roughly 1.4-1.5m barrels from Libya and the total figure not entering the markets stands around 5-6m bpd.

This is not a level playing field. What if all the embargoed and sanctioned production is allowed to return to the markets? How would the Opec then handle this additional output?

The current scenario is not normal. Supply possibilities are considerable. There is no dearth of it.

To be fair, a crude facade is currently enveloping the energy world. This cannot go on forever.

This facade has to crumble — today or tomorrow. What then remains a big question.

Published in Dawn, July 19th, 2020