For most of the past four years, OPEC has had an easy time.
The Organization of the Petroleum Exporting Countries hasn’t had to do much to keep oil prices over $100 a barrel. Disruptions in supply — most notably the Libyan civil war — and rising demand have kept the cartel’s coffers full. It has been, say Barclays’ commodities analysts, the culmination of OPEC’s “golden age.”
Is that golden age ending? High prices are often the seeds of their own destruction, providing incentives for new developments and alternatives. Now, over the past three months, global oil production has been outrunning consumption. The price of OPEC’s mix of crude oil has tumbled $32, or 30 percent, to the lowest level since 2012. And suddenly the 12-member group is bickering over who should cut oil output, and by how much, in order to prop up prices.
That has made Thursday’s OPEC meeting in Vienna the groups’s most closely watched session in years, with far-reaching implications from the local gasoline pump to the oil-dependent budgets of Russia and Iran.
Saudi Arabia, which has played the role of swing producer balancing the market, has not trimmed its output as it often has in the past, instead cutting prices to hang onto market share while waiting for other countries to volunteer to share the burden. Meanwhile prices have continued to slide to about $75 a barrel for the U.S. benchmark grade of West Texas Intermediate.
“I think they’re worried about a collapse in prices,” said Jon Alterman, director of the Middle East program at the Center for Strategic and International Studies. “They are worried about pushing people toward alternative fuels and worried about the cost of maintaining their spare capacity. They are intrigued by possibility that low prices put their enemies in tighter positions. But I think the way the Saudis think about global oil markets is more about threats than opportunities.”
In an unusual move, Venezuela has arranged a Tuesday meeting in Vienna with Russia officials to persuade Russia, a non-OPEC member that exports about 4 million barrels a day, to cut its production to prop up prices.
Russia has not coordinated output with OPEC in the past and after the Vienna meeting Rosneft chief executive Igor Sechin said Russia was not planning to cut oil production. But Russia's stake in the outcome of Thursday’s meeting is huge. At an earlier conference in Moscow, Russian Finance Minister Anton Siluanov said the country would lose between $90 billion and $100 billion in revenue as a result of lower oil prices, more than twice as much as it stands to lose as a result of sanctions, according to a Bloomberg News report.
But oil and commodity analysts doubt that OPEC can come to any agreement at all, or to one that would include production cuts large enough to stabilize prices.
There have been two main reasons for the recent surplus of crude oil: The economic stagnation in Europe and Japan has sapped demand and the steady increase in U.S. production of shale oil, up 4 million barrels a day over the past six years, has bolstered supply. That new incremental U.S. production is greater than the entire production of any OPEC country except Saudi Arabia.
“The reality of the shale revolution in the U.S., long scoffed at from within OPEC as high-cost folly, is now hitting the producer group where it hurts, while oil demand growth has underperformed significantly,” Citigroup commodities analysts said in a note to investors Monday. Over the past four years worldwide, oil companies have invested $2.5 trillion to bring new supplies online, according to Leonardo Magueri, an associate on the geopolitics of energy at the Harvard Kennedy School’s Belfer Center for Science and International Affairs.
Many analysts have said that Saudi Arabia, by maintaining a high level of oil output and driving prices down, has been trying to slow the U.S. shale oil boom by making drilling less profitable. Yet the consulting firm IHS has estimated that 80 percent of potential shale oil drilling in the United States is still profitable at $70 a barrel and that the growth in shale oil output would slow down at that price, but output would still be growing.
World crude oil production has also received a boost from Libya, where production has recovered somewhat, and Iraq, which is producing 300,000 barrels a day more than it was a year ago in part thanks to a new pipeline from Kurdistan to the Turkish port of Ceyhan. A deal struck recently between the Kurdish regional government and Baghdad — in which Baghdad released $500 million for the Kurds, who in return agreed to send 150,000 barrels a day to a federal government storage in Ceyhan — will smooth the way for more exports through that route.
Lower oil prices could revive global demand. Lower motor fuel prices act like a tax cut for consumers, and could help boost growth in the major economies.
But crude oil is priced in U.S. dollars, and the lower dollar price has been blunted by weak European currencies. Moreover, some countries have recently cut fuel subsidies, offsetting lower crude prices. Indonesia, for example, cut subsidies by 30 percent and gasoline and diesel prices soared, according to Argus Global Monitor, an authoritative industry newsletter. India’s new prime minister Narendra Modi took advantage of falling oil prices to free the price of diesel, a move that will save the government billions of dollars a year in subsidies. But diesel prices are up.
All this could be the recipe for a difficult meeting for OPEC. OPEC abandoned country quotas in 2011 in favor of an overall ceiling of 30 million barrels a day. (World consumption is about 92.4 million barrels a day, according to the International Energy Agency.)
Venezuela and Iran, each with large populations and heavy reliance on oil revenues, usually push for Saudi cutbacks. The Gulf Cooperation Council countries, the United Arab Emirates and Kuwait, usually trim a bit. Cuts by Angola and Nigeria might be needed because their high-quality crude competes most directly with the light U.S. shale oil.
Iran is in a special position. Its exports are limited by international sanctions while talks drag on about safeguarding its nuclear program. Low prices make it more pressing for Tehran to make a deal that would end sanctions, but an end to sanctions would also end up putting even more oil onto the market.
“Saudi Arabia, which has gained market share over the past three years, will have to bear the brunt of any cut,” said an editorial piece in the Argus Global Monitor. “But OPEC still needs to come to a collective agreement to avoid another steep price drop few of its members can avoid.”
Most analysts are expecting some OPEC production cuts, perhaps half a million barrels a day, but most of them also doubt at this point that the cuts will be big enough to increase, or even maintain, current prices. OPEC produced about 30.5 million barrels a day in the third quarter, the IEA says, 1.5 million to 2 million barrels a day more than the world needs to buy from the cartel in the coming months.
And if the cartel fails to reach an agreement, prices could continue to slide. “If OPEC doesn’t cut (which is our expectation), it represents a final piece of bad news driving oil prices into a final bout of selling,” said Pavel Molchanov, oil analyst with the investment firm of Raymond James.
Barclays suggested that the recent drop in prices might signal the end of OPEC’s golden age.
“For most of this century so far non-OPEC supply growth has lagged behind that of global oil demand meaning demand for OPEC oil has been on an upward trend,” the firm’s commodities analysts wrote in a note to investors on Monday. It said that between 2002 and 2013, OPEC increased its oil liquids output by 7.5 million barrels a day, twice as big an increase as in the decade before. And average crude oil prices rose four-fold and total OPEC revenues last year were around $1.4 trillion, more than five times greater than in 2002.
Now, however, with non-OPEC production climbing, demand for OPEC oil is ebbing. And OPEC’s control of prices, never disciplined, may get even weaker.
“There is huge difficulty in getting agreement on a major cut to production given all the competing interests and changes that have taken place...since the group last cut in late 2008,” Barclays wrote. “OPEC’s meeting on Thursday is likely to be the closest watched in many years and promises to be highly contentious.”