Is the potential slow death of OPEC a good thing?

December 4, 2008

(ChattahBox) — After a dive in oil prices from $148 a barrel to $50 a barrel in less than five months the Organization of Petroleum Exporting Countries (OPEC) are close to splitting apart. OPEC has had big problems before, but this time the cartel’s future looks especially bleak. While some members, such as Iran and Venezuela, are desperate to raise oil prices so they can balance their national accounts, more-conservative members, such as Saudi Arabia, can balance their budgets even at current prices, and fear they will be the scapegoats if the global recession deepens.

The Nov. 29 meeting in Cairo, Egypt, ended with members deeply divided. The Venezuelas and Irans of OPEC have dug themselves into such a big spending hole that their only way out would be for OPEC to raise prices by cutting production while letting the cartel’s hardest-pressed members cheat. According to consulting company PFC Energy, the United Arab Emirates, Algeria and Qatar would be the only OPEC nations able to balance their accounts in 2009 with oil below $50. Saudi Arabia would need oil prices just over $30 a barrel, according to Merrill Lynch, or slightly more than $50 a barrel, according to PFC Energy. In contrast, Iran needs a price of $90 to $100 a barrel to break even in 2009. And because of President Hugo Ch├ívez’s soaring spending on social programs, Venezuela needs an oil price somewhere between $60 and $120 a barrel; the consensus seems to be somewhere around $90.

OPEC couldn’t agree on any production cuts in Cairo but promised to revisit the issue Dec. 17. The burden of production cuts would fall almost totally on the Saudis and other conservative Middle Eastern oil producers. That’s why the Saudis didn’t buy into that deal in Cairo and why they might balk again. That result could leave OPEC standing but effectively end the cartel’s power to change the balance of global supply and demand.

In the short run, that would be great for consumers. In the long run, it would lead to global energy chaos. As it becomes more and more expensive to extract conventional and unconventional oil, the world is already looking at a bad case of underinvestment. The International Energy Agency has warned that a huge supply crunch awaits the world on the other side of the current supply glut because of underinvestment in new supplies of oil. Lower oil prices would just make that underinvestment worse.

So what is OPEC to do? As a whole it could cut production, raising global oil prices, while allowing the most hard-pressed countries to cut production only minimally. A cartelwide reduction in production might be able to raise prices, but that wouldn’t solve the problem confronting Nigeria, Iran, Venezuela and the like. To fill the hole in their budgets, they need to see oil prices climb and to keep pumping at current rates. OPEC’s inability to agree on any additional production cuts in Cairo means oil prices will fall further and that the problems confronting the governments of oil producers such as Nigeria, Venezuela and Iran will ratchet up toward crisis. The pressure is on OPEC to do something dramatic at its Dec. 17 meeting but it’s questionable if they will.


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One Response to “Is the potential slow death of OPEC a good thing?”

  1. Venezuela » Is the potential slow death of OPEC a good thing? : ChattahBox on December 4th, 2008 9:25 am

    […] Is the potential slow death of OPEC a good thing? : ChattahBoxWhile some members, such as Iran and Venezuela, are desperate to raise oil prices so they can balance their national accounts, more-conservative members, such as Saudi Arabia, can balance their budgets even at current prices, … […]

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