OPEC plan to raise oil price may not suc­ceed

China Daily (Hong Kong) - - VIEWS -

On Nov 30 when the Or­ga­ni­za­tion of Petroleum Ex­port­ing Coun­tries agreed to re­duce its out­put for the first time since 2008, international oil prices in­creased sharply. But will the OPEC plan to raise oil price by cutting out­put suc­ceed?

OPEC is the world’s most in­flu­en­tial oil car­tel and in­flu­ences oil prices by ma­nip­u­lat­ing pro­duc­tion tar­gets. How­ever, OPEC’s ca­pa­bil­ity to take con­certed ac­tion has weak­ened be­cause the num­ber of oil pro­duc­ers in the world has in­creased in re­cent years. As such OPEC’s mea­sures may not dampen the new pro­duc­ers’ en­thu­si­asm to in­crease their pro­duc­tion.

Ac­cord­ing to the Nov 30 agree­ment, OPEC mem­bers will start re­duc­ing their out­puts by 1.2 mil­lion bar­rels a day from their cur­rent lev­els from Jan­uary — equiv­a­lent to 1 per­cent of the to­tal global out­put — and non-OPEC oil pro­duc­ers in­clud­ing Rus­sia are ex­pected to cut their out­put by about 0.6 mil­lion bar­rels a day. But will ma­jor oil pro­duc­ers, such as Iran that is des­per­ate to ex­pand its oil pro­duc­tion and ex­ports to in­crease its rev­enue to main­tain its eco­nomic growth af­ter the decades-long West­ern sanc­tions are lifted, ben­e­fit by re­duc­ing their out­puts?

The questions raised by US pres­i­dent-elect Don­ald Trump over the Ira­nian nu­clear deal could also force Iran to ac­cel­er­ate its oil pro­duc­tion and thus ben­e­fit from the in­creased rev­enue be­fore the new US ad­min­is­tra­tion takes of­fice.

OPEC mem­bers don’t have a good record of ful­fill­ing its out­put re­duc­tion agree­ments. Data from Zero Hedge, a US eco­nomic blog­ger web­site, show that in the 17 OPEC agree­ments to cut out­put from 1982 to 2009, only about 60 per­cent of the “tar­gets” were achieved. Go­ing by the Zero Hedge data, a re­duc­tion of only 0.7 mil­lion bar­rels a day can be ex­pected from OPEC’s lat­est agree­ment.

Be­sides, the lat­est OPEC agree­ment does not in­clude Nige­ria and Libya, be­cause they have been ex­port­ing an ex­tra 0.5 mil­lion bar­rels a day since Oc­to­ber. Also, Nige­ria and Libya have said they plan to con­tin­u­ously in­crease their out­puts, which many ex­pect to make up for the re­duced oil out­put by OPEC.

OPEC has no rea­son to ex­pect non-mem­bers to cut their oil out- puts. Ac­cord­ing to OPEC’s lat­est agree­ment, non-mem­bers are ex­pected to re­duce pro­duc­tion by 0.6 mil­lion bar­rels a day, with Rus­sia cutting its out­put by 0.3 mil­lion bar­rels a day. The fact is that since 1998, Rus­sia has promised to re­duce its oil out­put four times but has cut it only twice and con­sid­er­ably in­creased it on the other two oc­ca­sions. More­over, Rus­sia says its cur­rent oil out­put is equal to re­duc­ing pro­duc­tion by 0.3 mil­lion bar­rels a day be­cause its orig­i­nal planned out­put for 2017 is more than the cur­rent level.

Other oil pro­duc­ers such as Brazil, Canada and Kaza­khstan, es­pe­cially Brazil and Kaza­khstan that face eco­nomic down­turn, have enough rea­sons to take ad­van­tage of the OPEC agree­ment and in­crease their oil out­puts and ex­ports. The se­ries of re­stric­tions im­posed by the United States on the pro­duc­tion of oil and gas that Trump has promised to sus­pend is also ex­pected to fur­ther lower the pro­duc­tion cost of the coun­try’s shale gas sec­tor and en­hance their com­pet­i­tive­ness in the global mar­ket.

From the per­spec­tive of oil de­mand, OPEC’s plan to main­tain oil prices by re­duc­ing out­put is not ex­pected to suc­ceed. New un­cer­tain­ties emerg­ing in the Euro­pean Union fol­low­ing Italy’s failed ref­er­en­dum on con­sti­tu­tional re­form, the un­like­li­hood of a con­sid­er­able in­crease in the de­mand for oil in China given its eco­nomic slow­down and other global fac­tors mean global oil con­sump­tion is not likely to in­crease in the year ahead.

Fur­ther­more, the pos­si­bil­ity of the US Fed­eral Re­serve rais­ing the in­ter­est rate, which will ac­cel­er­ate the flight of cap­i­tal from emerg­ing mar­kets to the US, will also curb the de­mand for oil and could deal a blow to OPEC’s plan.

The au­thor is a re­searcher at the International Trade and Eco­nomic Co­op­er­a­tion In­sti­tute of the Min­istry of Com­merce.

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