OPEC, IS, oil games and plung­ing prices

The Kurdish Globe - - NEWS - Bash­dar Pusho Is­maeel

When the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries (OPEC) was cre­ated in 1960, it brought to­gether a pow­er­ful club of oil pro­duc­ing coun­tries that wielded con­sid­er­able in­flu­ence on the oil mar­ket. Such was the power of the car­tel that it has been used to pro­mote po­lit­i­cal goals as well as eco­nomic lever­age over the years.

But the lat­est cri­sis in oil mar­kets, which has seen oil prices plunge by around 45% since June to be­tween $55-$60 a bar­rel, has demon­strated the in­creas­ingly dif­fi­cult predica­ment that OPEC faces. In a sur­prise move last month, OPEC mem­bers de­cided not to in­ter­vene by re­duc­ing out­put and the­o­ret­i­cally pro­vid­ing an ad­e­quate floor for oil prices, thus ac­cel­er­at­ing the plunge fur­ther.

No doubt there were also po­lit­i­cal con­no­ta­tions with such a decision. Some mem­bers, par­tic­u­larly Saudi Ara­bia, the big­gest oil pro­ducer by far in the car­tel, re­fused to cut sup­ply as it would threaten their mar­ket share.

The sim­ple fact is the global thirst for oil is no longer so firmly in the hands of OPEC. Vast jumps in tech­nol­ogy to ex­tract shale oil and gas has seen the US, a his­toric con­sumer of Saudi oil, be­come a net ex­porter and flood fur­ther sup­ply.

Then there is of course the huge oil sup­ply of nonOPEC pro­duc­ing coun­tries such as Rus­sia and Norway. The math is sim­ple. There is a glut of oil sup­plies and not enough global de­mand. Fears over the strength of the global eco­nomic re­cov­ery are true, but even then it doesn’t war­rant a 50% drop in oil prices in merely a few months, lead­ing to prices at lev­els not seen since the 2009 global eco­nomic cri­sis.

The majority


the OPEC coun­tries rely heav­ily on oil rev­enues as main source of in­come to support their econ­omy and bal­ance their books. Some coun­tries, such as Saudi Ara­bia, can sur­vive in the short-term due to vast for­eign ex­change re­serves but even then the games can­not last.

Each coun­try has a base price they need to main­tain rev­enues and almost all can­not sur­vive at circa $50 a bar­rel in the long-run.

What it does in the short­term, is in­hibit or even bank­rupt some shale pro­duc­ers whose op­er­a­tional costs will much higher owed to more ex­pen­sive hy­draulic frac­tur­ing and hor­i­zon­tal drilling ex­trac­tion meth­ods from shale rock. Less shale oil will of course mean less sup­ply of oil.

The de­clin­ing prices hurt Iran and Rus­sia more than most. This places ad­di­tional pres­sure on the re­spec- tive gov­ern­ments. First sanc­tions and now dras­ti­cally lower oil prices has se­verely crip­pled the Rus­sian econ­omy. It re­mains to be seen how much the eco­nomic bite may force a stub­born and de­ter­mined Rus­sia to change course over Syria and Ukraine. Iran is hardly in a much bet­ter eco­nomic po­si­tion with its own sanc­tions never mind its ex­pen­sive for­eign pol­icy in prop­ping Bashar al-As­sad and other Shi­ite forces in the re­gion, and low oil prices over the long-term may in­flu­ence its ne­go­ti­at­ing stance over its nu­clear pro­gram.

And one can hardly for­get the new­est mem­ber “state” of the oil ex­port club – the Is­lamic State (IS). The rich­est ter­ror­ist or­ga­ni­za­tion in his­tory is bol­stered by a re­ported daily in­come from oil fields they con­trol of any­thing be­tween 1-3 mil­lion USD per day.

IS would not be run­ning a fairly pro­duc­tive oil mar­ket if it didn’t have will­ing buy­ers across the Mid­dle East. IS oil was sold at any­where be­tween $30-60 per bar­rel, at over 50% dis­count from mar­ket prices, be­fore the oil crunch, mak­ing it a tempt­ing op­tion for many.

But if IS has to sell oil at $15-$30 per bar­rel that ob­vi­ously greatly di­min­ishes its fi­nan­cial clout and its ap­peal on the black mar­ket.

The prob­lem with any car­tel is that it must ben­e­fit all mem­bers, re­gard­less of any po­lit­i­cal pres­sure­cards. Long-term splits amongst mem­bers will fur­ther di­lute OPEC in­flu­ence. OPEC may be forced to strike a deal with other non-OPEC pro­duc­ers over sup­ply to bring long-term sta­bil­ity.

In the short-term prices will re­main low, but if shale pro­duc­ers and cer­tain other coun­tries can­not meet ex­port tar­gets due to cost, this may use up re­main­ing spare ca­pac­ity and the sec­ond half of 2015 will see a spike in oil prices.

But then what? The games re­sume with some ca­su­al­ties out of the pic­ture but fun­da­men­tally the prob­lem re­mains the same (lack of con­trol of sup­ply ver­sus de­mand)

Many oil pro­duc­ing coun­tries are no way near their ca­pa­bil­ity. Take Iraq, which has po­ten­tial for the most growth in ex­ports amongst the OPEC mem­bers. Add to its sym­bolic deal with the Kur­dis­tan Re­gion over oil-ex­ports and rev­enue shar­ing that ended a bit­ter long-run­ning feud, then the scene is set for a new dom­i­nant role for Iraq. It needs bil­lions of in­vest­ment to support its oil ex­port growth tar­gets and of course oil it­self will need to be the main source of that fund­ing.

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