Low-priced oil still has the power to shock

Enterprise - - Outlook -

OPEC has sown the wind and reaped the whirl­wind. When min­is­ters from the oil ex­porters’ car­tel met a year ago, they de­cided not to cut pro­duc­tion in spite of mount­ing global over­sup­ply. When they meet again in Vi­enna, they will be re­flect­ing on the con­se­quences of that de­ci­sion.

Phase one of the plan - al­low­ing crude prices to fall - has worked all too well. Phase two - watch­ing as mar­ket forces choke off high­er­cost pro­duc­tion, es­pe­cially in North Amer­ica and Europe - is tak­ing longer than they might have hoped.

The re­sults have been painful for ev­ery OPEC mem­ber. Venezuela is in tur­moil, with ram­pant in­fla­tion and plung­ing gross do­mes­tic prod­uct. Nige­ria’s stock mar­ket has hit a three­year low, as growth has slowed to its slow­est pace since 1999.

Even Saudi Ara­bia, the ar­chi­tect of the car­tel’s strat­egy, has been forced to cut spend­ing and is plan­ning to tap in­ter­na­tional mar­kets for fi­nanc­ing. Saudi of­fi­cials have started suggest­ing in pri­vate brief­ings that at $ 45 per bar­rel, cheap oil has be­come too much of a good thing. They ar­gue that it needs to re­cover to $ 60$80 to en­cour­age enough sup­ply to meet fu­ture de­mand.

The longer oil stays low, the greater the threat to fu­ture pro­duc­tion. Al­ready projects worth $220bn have been de­layed or can­celled, cut­ting 2m bar­rels per day from forecast oil sup­ply in 2020, ac­cord­ing to Wood Macken­zie, the con­sul­tancy.

A longer pe­riod of low oil prices also raises the fi­nan­cial strain on oil pro­duc­ing coun­tries and in­creases the dan­ger that one of them will crack.

Venezuela, which is fac­ing an im­por­tant elec­tion, looks the most vul­ner­a­ble to­day, but there are many oth­ers that are at risk.

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