Editorial Why OPEC will not cut production? The oil ministers of two powerful OPEC members, Saudi Arabia and the United Arab Emirates, have said they will not cut production to shore up oil prices because non-OPEC producers refuse to do the same. In fact, the production of non-OPEC countries is rising constantly, which has led to a free fall in oil prices in the global market. It appears that OPEC countries are in competition with the US Shale industry, which is braced for a test of endurance. There is a perception that weak companies in the US would face the threat of dwindling investment, faltering production, forced asset sales and possible bankruptcy. The successful companies of course will be the ones that are most effective at improving their efficiency, and will continue to be a threat to the OPEC producers. The world’s biggest oil companies faced ruin in the summer of 1931 because of oil glut. History is repeating itself, and the stressed-out giants of today are Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries (OPEC). At $55 a barrel, Brent crude is down 50 percent since June. The question is why OPEC didn’t reduce quotas at its meeting in Vienna on Nov. 27? It is due to cheap and abundant as crude in North Dakota in the US, and the Saudis hope to drive oil prices below where it makes sense for American shale producers to invest in new production. But shale producers have lowered their costs so much that in key fields they can make profits at $50 a barrel. That’s above core OPEC members’ exploration and production costs but below what many need to cover their government spending. In fact, prices are being forced down not by any action or inaction of the Saudis but by the American shale producers, who are simply producing all the oil they can to maximize their profits. “Collectively, they are not the most sophisticated folks, especially when it comes to world markets,” says Charles Ebinger, a senior fellow in the Energy Security Initiative at the Brookings Institution. According to another view, the shale producers don’t need to be sophisticates. Each operator is so small that it can increase production without pushing down the market price. OPEC used to be a force to reckon with. For a brief period in the 1970s its influence was so strong, it could set prices to the penny for scores of crudes, says Bhushan Bahree, senior director for OPEC Middle East research at market researcher IHS. But its power has waned considerably. The determination of powerful Gulf OPEC members to stifle competition from new oil producers has left the global energy market reeling and sparked unprecedented uncertainty. Gathered in Abu Dhabi for a key conference, senior energy officials from Arab Gulf nations insisted they will not cut production despite the freefall in oil prices. A supply glut, lower demand and the stronger US dollar have all contributed to pushing down oil prices, which have dropped nearly 50 percent since June to around $55 a barrel. Experts say there is little doubt that OPEC is looking to drive new producers with higher costs – in particular North American shale ventures – out of the market. And how long the effort will continue is anyone’s guess. “Things could need one year, two years or three. We don’t know what will happen in the future”, the Saudi minister said. OPEC’s conventional producers, for decades part of an oil alliance that has dominated the global energy trade, have been feeling the pressure from the emergence of shale oil. Technological innovations have unlocked shale resources in North America and raised daily US oil output by more than 40 percent since 2006, but at a production cost which can be three or four times that of extracting Middle Eastern oil. If shale oil producers can compete with the OPEC producers at $55 per barrel, the latter’s economies will be adversely impacted. It means that chances of windfall profits for oil producers are slim, and Arab countries will have to review their budgets and abandon their ostentatious living styles. Oil importing countries like Pakistan stand to gain from the declining oil prices, and could save foreign exchange to the tune of $2 to 3 billion a year due to lower import bill.
Posted on: Wed, 24 Dec 2014 06:00:28 +0000
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