over 2 years ago • 3 mins
The oil price hit a six-year high on Tuesday, after discussions between the world’s biggest oil-producing nations and their allies – known as OPEC+ – heated up and broke down.
What does this mean?
OPEC+ first rolled out a host of production cuts during the pandemic in an effort to boost the oil price, and it met again last week to discuss finally dialing them back. But the talks were scuppered by a disagreement between Saudi Arabia – the group’s de facto leader – and the United Arab Emirates.
Short of a change of heart, that means current production limits will stay in place for at least another month. That’s not ideal: this tiff is depriving pandemic-battered economies of the oil they need to get back on their feet. The prospect of a major imbalance of supply and demand, then, sent oil’s price to almost $80 a barrel – its highest since 2014.
Why should I care?
For markets: A man’s word is his – never mind.
Production limits are more of a gentleman’s agreement than anything: OPEC+ members don’t have to stick to them. And with prices soaring and profits up for grabs, they might be tempted to get back to pumping. That’s raising the specter of last year’s price war, when they went flat out and sent prices crashing. Investors, for their part, seem wary of exactly that: the prices of oil futures contracts are lower than the current price of oil, suggesting they think the dusky nectar will be worth less down the line.
The bigger picture: The ECB shakes things up.
Higher oil prices – which increase the costs of energy and gas – tend to lead to higher inflation, so the world’s central banks will be keeping a close eye on how the situation gets resolved. None more so than the European Central Bank, which is meeting this week to discuss tweaking its inflation target – a shift in strategy that’d be one of its most significant in two decades.
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Even more carmakers announced this week that they were cutting production on the back of the global chip shortage, but hey – at least you’ll finally be able to get a parking space.
What does this mean?
The chip shortage has been haunting car firms this year: they reportedly pay less than other chip-dependent companies, which sends them to the back of a very long queue. That might be why Britain’s Jaguar Land Rover warned on Tuesday that its car deliveries would be 50% lower than expected this quarter, while Germany’s Mercedes-Benz – the world’s biggest luxury car brand – said its deliveries would be constrained for the next two. And it’s not just European companies: those warnings came just a day after China’s biggest carmaker – SAIC Motor – announced that it’d slashed its production plans by around 500,000 cars in the first half of 2021.
Why should I care?
For markets: This isn’t getting fixed fast.
Tata Motors – Jaguar Land Rover’s Indian parent company – saw its share price drop nearly 9% on Tuesday’s news, while Mercedes-Benz owner Daimler’s fell 4%. And this is just the start, with the shortage expected to cause issues until 2023. That could put carmarkers seriously out of pocket: one consulting firm recently upped its estimate of lost carmaker revenue to $110 billion this year alone – and that was before the latest announcements.
Zooming out: Carmakers adapt to survive.
The chip crisis has forced car companies to adjust their strategies. Jaguar Land Rover, for one, is planning to focus production on more profitable models for as long as the shortage persists. Ford, meanwhile, has put more emphasis on its finance business, which lends customers money to buy pre-owned vehicles. Buyers, after all, are turning to second-hand cars in the face of a lower supply of new ones, driving up their prices at a record rate.
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