For six years, the biannual meetings of the Organization of Petroleum Exporting Countries (OPEC) in Vienna were of rhetorical conclaves whose twelve members emerged on an invariable conclusion: the market is well supplied and the price of black gold protects the interests of producers and consumers. With the price of a barrel swinging from 100 to 120 dollars between late 2010 and mid-2014, producing countries were reaping comfortable revenues and Western economies less dependent on oil, and feeling quite comfortable with it.
In about six months, the situation has changed: prices have dropped 30% to fall below 80 dollars. And the top meeting of the cartel, scheduled for Thursday, 27 November in Vienna, the rather consensual climate that prevailed among its members will change, too.
What will OPEC do?
Probably not much, if one believes the Saudi Oil Minister Ali al-Naimi, the strongman of the organization, who expects a “stabilization of futures market”. However, the cartel still has market power. “Historical analysis of its positions in a context of sharp fall in prices shows that when it takes a firm and credible decision or a review of its production quotas, prices bounce,” says Olivier Appert, president of the French Petroleum Institute Energies Nouvelles (IFP FR).
This was true in 1986. Tired to support the decline in production to support prices, the Saudis had left it spinning and prices unscrewed, falling to less than 10 dollars a barrel until OPEC decided in August 1986 to tighten the valves to raise prices. Same scenario unfurled in 1998-1999, after the Asian crisis. The cartel reduced its daily production of 4.3 million barrels to stop a fall below 12 dollars a barrel. Successfully again.
This axiom has further verified in Oran (Algeria), December 17, 2008, three months after the bankruptcy of Lehman Brothers and the start of the global economic crisis. During the previous summer, a barrel reached a historic peak at 147 dollars; six months later, it was down to $35! OPEC decided to withdraw from the market 2.2 million barrels, which were in addition to other discounts. In total, it had reduced its production of 4.8 million barrels in a few months, the quota falling to 24.8 million barrels, which had gradually increased prices up to 100 dollars.
Today, the cards have been redistributed and the member countries of OPEC – think Saudi Arabia – are ever faced with competition from non-OPEC countries. Second largest producer, Russia, has no plans to cut production, saying that lower prices first affects countries where mining costs are high. Including the United States. For now, the collapse in oil prices mainly greatly reduced budget revenues in Moscow. The public company Rosneft announced on Tuesday reduction of daily production of 25 000 barrels – a drop of oil production that is fully realized when compared to 4.1 million barrels it extracts every day. In the United States oil production (9 million barrels) is close to those of the Russians and Saudis have no more intention to curb the production of oil shale in Texas and Dakota that strengthen their security energy. “In two years, sums up Mr. Appert, the Americans created a second Norway!”
OPEC finds, worried that its share of the world oil market is shrinking; it fell from 42% in 2008 to 35% in 2014. The cartel is fighting to keep it. Especially Saudi Arabia, that pumps 12% of the world’s black gold. It will not only bring the weight of a reduction in output, but even goes further to grant discounts to Asian, European and US refiners. After years of high prices, Ryad garnered huge foreign exchange reserves and has the time to see it coming, like other oil monarchies of the Persian Gulf. Some sources indicate that the Wahhabi kingdom will not move until the barrel reaches 70 dollars.
But not all of the OPEC countries have such deep pockets. If it takes an average of $105 a barrel to balance their budgets, according to the Arab Petroleum Investment Corporation, the “breakeven” tax is 90 dollars for Saudi Arabia, but $160 for Venezuela. We understand, in these conditions, that their representatives did not arrive in Vienna with the same objectives. “The oil market is oversupplied, a situation that will worsen next year, and OPEC must respond with the support of non-producers in the organization,” said Iranian Oil Minister Bijan Namdar Zanganeh.
Other OPEC division factor is the recent difficulties of many of its members. Iran, Iraq and Libya have not recovered their optimum level of production. 10 million barrels per day at its peak, it fell to less than 7 million. According to Bloomberg, in case of declining quota or effort demanded to return 30.6 million to 30 million barrels, the official quota, the three countries would be exempted from the effort.
In thirty years, OPEC has intervened fifty times on the market: 22 times to lower prices, 27 times to get them back, says IFP IN. For Mr. Appert, the lessons of the past show that if the organization does not move during its meeting in Vienna, “it will respond in the coming months,” the low prices to continue until the summer, according to the IEA.