OPEC likely to continue price war

OPEC likely to continue price war

The OPEC’s December meeting might cause more stir than usual, as the period of low oil prices enters its 18th month with no visible signs of changes in sight, and growing dissatisfaction with Riyadh’s leadership.

The price war between the Cartel and non-OPEC producers was partially caused by the Saudi refusal to cut production in November 2014.

The initial idea behind it was to bankrupt the US shale industry with low oil prices. In theory, this would solve the oil glut; push the oil prices, while allowing the Kingdom to preserve its market portion.

In practice, things did not work out so well, and the bill that OPEC might have to pay could be higher than initially expected. The oil glut problem has actually become more acute in the past 12 months, and although the US production has slowly started to decrease, the shale sector has shown a remarkable resilience so far.

In addition, Iran is eager to alleviate the impact of long-standing international isolation and current low prices with a production increase of 1 million b/d in the next six months.

Unlike the United States and other developed countries, where the blessings of cheap energy offset the negative impacts of low prices on oil industry, the OPEC countries with their high dependency on oil exports have been hit hard.

Saudi Arabia, which collects 88% of its state revenues from oil exports, is facing a fiscal deficit of at least $145 billion in 2015, which makes more than 20% of its GDP. In comparison, the 2014 deficit was $17.5 billion. Despite heavy losses, the Kingdom is still in a good position with its hard currency cushion, but according to the IMF, the country might run out of money in five years if it continues to lavishly subsidize public services in the current low oil price environment.

Other Cartel members, such as Venezuela and Nigeria are in more dire straits and they, along with Iran, are the most likely dissidents against the current course. Venezuela is a staunch advocate of a negotiated equilibrium with non-OPEC producers that might push prices to more bearable levels of $70 per barrel. The Chavinsta regime of Nicholas Maduro desperately needs a strong financial boost to preserve its legitimacy amid economic collapse and the inevitable defeat at the December parliamentary elections.

Nigerian oil revenues, which account for 35% of the country’s GDP, fell by 67% since October 2014. As a consequence, the national currency Naira devaluated by 25%, and the hard currency reserves fell by more than 20%, thus further destabilizing the country’s already fragile political stability.

The rebels within the OPEC ranks are gaining momentum, and Saudi Arabia, as the organization’s informal leader, will have a hard time to quell dissatisfaction among its fellow members. Although it is unlikely that Riyadh will change its mind and reverse the current course at the next biannual meeting, mounting pressures within the organization could soon become too strong to resist.

According to Goldman Sachs’ forecast, oil prices could fall to as low as $20 per barrel in the next 12 months, as the Chinese economy continues to slow down and storages worldwide quickly run out of space.

In the long run, the OPEC producers, with their poorly diversified economies, are bound to fail in this war of barrels. Despite current woes, the US production is likely to remain high as the shale industry and technology quickly adapt in order to sustain current production levels, and the US banking sector is still willing to finance it.

Such situation will eventually leave the OPEC and its members with a harsh choice between cutting production and risking gradual bankruptcy.

Either way, low oil prices are here to stay for some time, and the OPEC oil producers will have to budge. The real question is whether they can afford it without causing political earthquakes along the way.  

About Author

Ante Batovic

Ante was previously a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was also a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a master’s degree in Global Politics from the London School of Economics and a PhD from the University of Zadar.