Once the indisputable ruler of oil markets, the OPEC cartel is under great pressure to revise its current policy as low oil prices are starting to hurt oil exporters’ economies and threaten to split the Organisation apart.
The past year was not good for OPEC. The global oil glut slashed oil prices by more than 50%, and brought into question the traditional role of the Organisation as a key global market mover. However, the downward trend had already begun by the beginning of the decade, when the US shale revolution, helped by the $100+ oil prices, started to affect global oil markets.
The past five years have completely changed oil market flows. With US production increasing and oil imports rapidly declining, many oil exporters such as Nigeria, Libya, Algeria, and Angola were completely locked out of the American market. Others, like Saudi Arabia, are fighting hard to retain their global market share by continuing to pump vast quantities of oil.
How successful has this strategy been since it was introduced in October 2014? In terms of market share, the cartel succeeded in retaining traditional markets, but at a heavy price for its revenues.
According to J.P. Morgan, Saudi Arabia alone loses around $90 billion a year with oil prices staying at $60 per barrel, and with Goldman Sachs predicting the oil prices to stick at $50 per barrel by 2020, it will be hard for Riyadh to maintain its influence and cohesion within the Organisation.
Source: Business Insider
Source: EIA
Another goal – to suffocate the US shale industry with low prices – brought mixed results, and in the long term it will probably fail. The US producers were forced to cut capital spending and significantly lower their breakeven prices.
Nonetheless, US producers are still succeeding in keeping their heads above the water, even with the prices as low as $40 per barrel of the WTI traded oil. In addition, the sudden drop in prices helped the industry to consolidate, both in terms of productivity and cost efficiency, and although some of the production will inevitably become unsustainable, the core areas can continue to pump oil at a profit with prices as low as $30 per barrel.
The Saudis took a gamble, but it seems that the calculation was misleading. The final result could be not only a loss in revenues, but also a major split between the rich Gulf States, and the less fortunate ones – the African and Latin American states, Iran, Iraq, and Libya – and consequently the end of OPEC as we know it today.
With the cartel losing its ability to influence the global price of oil, the Organisation might soon dissolve, since many member countries will not be able to provide basic services at today’s prices. These countries desperately need oil revenues to keep them moving and to preserve their economic and political stability.
In the current climate it is hard to foresee oil prices bouncing back to previous levels. Considering that the markets are still oversupplied with around 3 million barrels per day, and that Iran’s production is expected to beef up the glut by another 400-600,000 barrels per day, the period of low prices may continue for several more years.
There is no easy solution for today’s situation. The OPEC leaders are correct to point out that the cartel is not the one to act alone. However, in current circumstances, due to weak balance sheets and extreme reliance on oil exports, the OPEC members will bear the greatest economic and social brunt of the falling prices. S
audi Arabia, as the most influential member of the club, needs to understand this and act accordingly if it wants to preserve its regional and global role.
