The solid façade of OPEC is crumbling.
The latest indication that all is not well within the ranks of the oil cartel came yesterday, when the organization released its monthly Bulletin.
Inside the magazine, the commentary slammed non-member nations for failing to follow the organization’s lead in “stabilizing” oil prices and having “go it alone” attitudes.
But despite the essay’s reprimanding tone, I found two more hints that OPEC is losing its grip on world energy domination.
OPEC’s Grasp on Oil Control Loosens…
Although OPEC’s unusual report accused no country by name of blatantly snubbing its policies, it specifically noted that the U.S., along with Canada, (both shale oil sources) had increased production by 6.3 million barrels a day over the past nine years while OPEC had kept its aggregate volume at 30 million.
Traditionally, OPEC has served as the “global balancer” – increasing or cutting oil exports to maintain pricing ranges.
This time, however, it wants those cuts to come from elsewhere.
OPEC still controls 40% of the world’s production. Yet that does not have the impact it had previously.
And with some 86% of the world’s extractable unconventional crude located outside OPEC membership, the problem for the cartel will only become worse as more nations seek to satisfy more demand locally.
Led by Saudi Arabia, last November OPEC announced it had kept its production unchanged, precipitating the final major decline in crude prices. In one day, oil fell by 7% to $69.
True, the decision prompted some cuts from Russia in the face of a declining economy and a faltering currency (both direct results of low oil prices). And the ongoing civil war in Libya has effectively stopped all oil exports from that country.
… And the U.S.’s Energy Dominance Strengthens
But in Saudi Arabia’s eyes, the main culprit remains the U.S., whose expanding shale and tight oil production has shifted the “balancer” position in global oil from OPEC to the Americans.
My international contacts confirm that the U.S. production success has taken the main OPEC powerbrokers – the Saudis, Kuwait, and the United Arab Emirates – by surprise.
More oil is coming quicker than anticipated. Analysts are expecting American oil production to average 9.65 million barrels per day in 2015, beating the previous all-time record of 9.6 million in 1970.
This makes the initiative in yesterday’s Bulletin all the more interesting.
For decades, OPEC has regarded the crude market as essentially its own to control. But the cartel now writes, “There is a stubborn willingness of some non-OPEC producers to adopt a go-it-alone attitude, with scant regard for the consequences,” adding, “In the past, OPEC has often shouldered the burden of ensuring oil market stability alone. In the current situation, which should be of great concern to ALL, is it not time for this burden to be shared?”
It seems even in the oil market that karma can come back to bite you.
Private Enterprise Will Destroy OPEC
The truth is that, unless there is a worldwide agreement to stabilize production, the OPEC approach will fail. Of course, for the “stability” in pricing to take place an absolute decline in extractions must occur in the U.S.
Now, there are some tough choices on the horizon for some American oil companies. But these are resulting from domestic market pricing and high-risk debt concerns, not from what is happening elsewhere in the world.
That’s the most fascinating – and even vindicating – reason for the remarkable expansion of U.S. oil production.
These companies are all examples of private enterprise, a matter always difficult for national oil companies run by their respective states to understand.
And the problems that they face once again demonstrate the superiority of the U.S. economic system in which they conduct their businesses.
These are the problems whose solutions are going to cause certain energy investments to flourish as oil prices go higher – not any move from OPEC.
Open Dissention Within OPEC’s Ranks Weakens the Cartel
There is, however, another subtext in the OPEC commentary worth considering. It is an element I have commented on recently right here in OEI.
Disagreements are arising within OPEC itself over the move to keep production stable and prices low.
As I have mentioned before, OPEC members Venezuela, Iran, and Nigeria desperately need oil prices much higher (well over $100 a barrel) for any chance to save their teetering central budgets.
These cartel countries and others from within OPEC’s ranks have been exporting volumes higher than their monthly quotas from the cartel justify. These are the countries OPEC is condemning for having “go it alone” attitudes.
And some of these impoverished OPEC countries are starting to openly show their dissent.
Last Wednesday, Samir Kamal, Libya’s OPEC governor and director of the planning division at the country’s oil ministry, stated that members should change course and cut oil supply by 800,000 barrels per day or more to prevent an expected return of Iranian exports from weighing on prices.
There are two interesting aspects to this statement.
First, just about every expert inside and outside OPEC recognizes that it will take quite some time before Iranian increased exports hit the market, assuming a nuclear accord is even reached. Given the state of the Iranian oil sector, some estimates are now putting the time needed at several years, not months.
Kemal might have been using Iran as an example. But his comments obviously address the economic pain felt by OPEC members due to the current policy of stabilizing prices.
Second, his comments were not submitted in a memo to OPEC or contributed to the Bulletin magazine. His opinions were contained in an unsolicited email to Reuters, an international news agency.
Saudi Arabia has some juggling to do. Not only is opposition to its OPEC policies becoming more pronounced within the cartel…
It is now going public.
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