Low-priced oil still has the power to shock
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.