There was a time when OPEC could arm-twist governments, economies and industries by threatening to raise or slash crude output, but that was a long, long time ago.
Last week’s closely watched meeting of the oil producing group proved two things. One, OPEC’s influence as a cohesive group might have waned as differences erupt between Gulf and non-Gulf members. Two, oil prices that have been in free fall for sometime could fall further. That is good news for a country such as India that imports most of its needs, but will put further pressure on economies of some OPEC member countries fast dissolving in the market glut.
By deciding to keep pumping about 31.5 million barrels a day before revisiting the issue again only in June, OPEC has probably ensured that prices would go below the the six-years low they are at already. Prices of crude oil dropped nearly 40 percent last year, and another round of falls began soon after last week’s meeting. There is talk all around that prices could fall to $20/barrel in the new year.
It is a battle of wits in which Gulf-based OPEC members are pitched against the high-cost U.S. industry that was fast making the world’s biggest oil guzzler self sufficient.
The current OPEC oversupply is only going to increase as there is now no ceiling on production and nobody is obliged to cut, and Iran, which is coming out of sanctions, has said it won’t accept any cuts until it increases it production by one million barrels/day.
Here is a quick look at what is happening across countries thanks to the OPEC decision
- Incomes of OPEC members countries are getting squeezed badly. According to the International Energy Agency, their combined revenues from oil could fall to $550 billon from an average of $1 trillion in the past five years.
- Non-Gulf OPEC countries are hurting because they desperately want the prices to go up. They need money, which they are being not allowed to make
- The U.S. oil industry is beginning to hurt (Saudi wants that to happen anyway), as oil prices are raising costs for drillers)
- Global oil companies are seeing their profits fall, putting pressure in stock prices and jobs
- Iran will come bigger in the market once the sanctions lift, but low proices mean their economic recovery will be slower (works well for the Saudis who hate Iran)
- The Saudi stubborness will likely lead to bigger problems for the Gulf’s biggest economy and the Gulf region itself, as Saudi Arabia runs low on cash. According to the IMF, Saudi Arabia could run out of cash in five years if prices are not increased because higher domestic spending is eating into reserves.
The good news is only for the consumers, who are having to pay less at the pumps in many countries, including the United States where gasoline prices are expected to hit a low of $2/gallon.