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Wednesday, November 26, 2014

OPEC Control Crumbling?

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OPEC is single-handedly responsible for much of the misery in the world. It's oil embargo in the 1970's permanently crippled the economies of industrial nations, and marked the beginning of the decline of wages for the working class. Its member nations' coffers have and continue to fund most of the terrorism in the world. The jump in oil prices in 2007-2008 was one of the significant factors in causing the financial crises, and continued high energy prices have helped keep the West mired in recession. 

Notwithstanding the efforts of the likes of Obama, Gore, Tom Steyer, and a plethora of other wealthy people and environmental groups that benefit from OPEC's largesse, to shut down oil production on federal land and stop the Keystone XL pipeline, advances in fracking and other extraction technologies is making the OPEC monopoly difficult to maintain.

The Washington Post reports:
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.”
 Other members are being more proactive. According to the Post, Venezuela has met with Russian leaders in an attempt to convince Russia to reduce its output in an attempt to push prices higher.
 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. [And, although not mentioned in the article, ISIS is selling oil at steeply discounted rates]. 
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.
 A Businessweek article also explains the conundrum facing the OPEC members and other major oil exporters:
Then there’s Saudi Arabia, which is still at the wheel of OPEC as its top producer. The Saudis still enjoy some of the lowest production costs in the world, so they can sustain a much lower price and still not worry about financing themselves. That’s a luxury many OPEC members don’t have. Venezuela, Iran, Iraq, Libya, and even Russia all need oil prices higher than $100 a barrel to keep their deficits in check. 
Right now the Saudis are a lot less worried about the budget deficits of their fellow oil exporters as they are about what’s happening in North Dakota and Texas. The biggest threat to the power the Saudis have wielded as the de-facto head of OPEC for the past 30 years isn’t cheap oil; it’s the 9 million barrels a day coming out of the U.S. The Saudis would much rather play a game of chicken with U.S. producers than bow to the wishes of Iran, which they’re in no hurry to accommodate given their disagreements over the Assad regime in Syria, not to mention Iran’s burgeoning alliance with Iraq. 
For decades Saudi Arabia has been the preferred partner of the U.S. in the Middle East. At the heart of that partnership was America’s clear dependence on Saudi Arabia for its oil. But that dependence has diminished significantly over the past few years as U.S. refiners have substituted oil from the shale boom for imported oil.
In order to put U.S. oil producers out of business, oil will have to drop to $70 per barrel or less.

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