by Lina Nagell
The Technical meeting between oil experts from OPEC members and 8 non-member oil producer states on Wednesday, 21st of October, did not reach an agreement to cut production. This comes as no surprise, taking into account that participants were in fact unable to agree on joint press releases at their two last meetings.
Recent reports suggest that the meeting did result in an agreement to share information to better assess the market.
Fragile five in dire straits
Since its creation at the Baghdad conference in the 1960s, OPEC’s objectives and abilities to influence world oil prices have changed. From an influential yet uncoordinated actor where individual member states’ interests far surpassed that of the cartel as a whole, OPEC rose to infamy during the 1970’s oil crisis. Today we see a new OPEC, unwilling to jeopardize future market share for short-term gains. OPEC, with Saudi Arabia at its hem, decided to abandon the role of global swing producer of oil in November 2014 – facing oversupply due to the U.S. shale revolution. Oil prices has fallen dramatically since then, leaving some OPEC member states in dire straits.
The fragile five include Venezuela, Nigeria, Libya, Algeria and Iraq. Facing increasing public unrest as a result of decreased revenue resulting from lower oil prices, Venezuela was the instigator of the technical meeting of oil experts in Vienna. Raising its original call for price control of $70 per barrel to a whooping $88 per barrel (stated to be an equilibrium price by the nation), some participants claimed that the call was simply a PR stunt. Venezuela has been trying to influence OPEC to return to set prices for already some time. Along with other OPEC member states, Venezuela is one of the OPEC members dependent on high oil prices to cover necessary public expenditures needed to maintain their, to a large extent, authoritarian regime. In this sense OPEC’s strategy to endure current losses to protect future market share, could pose and existential threat to some of its members. Observers are stating that not even oil producing giant Saudi Arabia is safe in the long run.
Saudi Arabia – no money no problem?
When Saudi Arabia became the key proponent of not introducing production quotas back in 2014, there was a strong belief that the country would be able to withstand the consequences of lower oil prices. However, today’s situation demonstrates that Saudi Arabia miscalculated the extent to which oil prices would decrease. Aspects that were not accounted for include continuing drops in demand and the resilience of the U.S. shale industry. A recent IMF report suggests that Saudi Arabia needs a price per barrel of $100 to balance its budget while maintaining its current public expenditure levels. The same report states that Saudi Arabia could in fact keep current levels of expenditure, financed largely through reserves, for maximum five years – estimating current debt at 20% of GDP. Other observers disagree and have a grim outlook on Saudi Arabia’s ability to continue at current expenditure levels over 2-4 years, especially considering the kingdom’s expenditures associated with wars in Yemen and Syria. There is no doubt that Saudi Arabia needs higher oil prices, and it needs to happen within a period of 2-4 years.
Get into the swing
With OPEC and Saudi Arabia out of the race, who could – if any, – take over the role as global swing producer of oil?
Observers pointing to the U.S. are not taking into account differences in market structure between U.S. and other oil producing nations where state companies dominate. Even if the U.S. export ban on oil were to be lifted, which is quite an if considering the White House’s threat to veto, the U.S. market is characterized by many small producers. A large-scale coordination amongst them would be necessary, a development seen as unlikely. There is little evidence of such a desire amongst the small producers, antitrust laws put up to limit this kind of behaviour would also certainly constitute a major barrier.
The invitation of eight non-OPEC member states in the meeting on Wednesday, whereas five decided to participate, could suggest that OPEC is hoping to spread responsibility of production cuts among other oil producing nations. Statements made by Saudi Arabian Oil Minister al-Naimi and OPEC Secretary General Salem el-Badri, could support this claim. The two suggested that though production cuts could help increase prices, Saudi Arabia is not able to do it alone. This is supported by claims that Saudi Arabia is in fact no longer able to act as a swing producer due to its lacking ability to increase production notably in the short term. Venezuela recently called for Russia to cut production alongside OPEC, a proposal supported by Iran, albeit not Russia itself. In fact, Russian Deputy Minister Arkady Dvotkovich ruled out any production cuts, in September.
Light at the end of the tunnel?
Some observer’s point to a light at the end of the tunnel; claiming that decreased activity in U.S. shale industry will lead to a drop in supply, followed by an increase in prices. This is a short-term analysis. U.S. shale industry has shown a remarkable adaptability in the face of falling oil prices, and the industry is capable of starting and boosting production on relatively short notice. Nearly 30% of wells started in 2014 can in fact break even at $81 per barrel. Compared to some Middle Eastern producers with profitable onshore production at $10 per barrel, this is still not competitive, but the nature of the political regimes in many of these Middle Eastern oil producing countries, however, require a much higher oil price to stay afloat – closer to the price needed for U.S. shale industry to thrive. Taking into account that U.S. shale industry is constantly working to become more productive, some wells profitable at $30 per barrel, it is not unlikely that we will see massive increases in productivity in U.S. shale industry – especially as prices again start to rise. Keeping this is mind, OPEC and Saudi Arabia’s strategy to outcompete U.S. shale seems less than bulletproof. Major oil producing countries might have to face the fact that the future entails a lower oil price than seen in a long time, which could have potentially devastating effects on the regimes within OPEC and around the world.