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Has OPEC Lost its Mojo?

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OPEC’s meeting over the weekend, which held off from making further cuts despite oil prices hovering in the low $50s per barrel, a level that is causing distress among the cartels’ members.

What was eyecatching, however, was not the failure to act per se but the byplay. As we noted earlier, OPEC members tend to cheat even in good times and pump in excess of quotas. The incentive to exceed limits is even greater when national budgets are strained by a plunge in oil revenues, the mainstay of these economies. We had posted on the fact that Nigeria, which had conformed to the latest production cut, would not implement an additional reduction until other OPEC members lived up to their recent commitment.

OPEC members said they would like to reduce production a further million to million and a half barrels in December, but the Saudis, backing Nigeria’s position, are apparently asking for proof that other members are indeed living up to quotas.

This could get interesting.

Note some further novel moves, again signs of strain:

1. OPEC has set a target price of $75 a barrel (note they had abandoned targets four years ago). A lot of oil stock analysts have their targets at $90.

2. OPEC is now calling for non cartel-members to help. This is further evidence of the producer group’s diminished power. Consider this bit from Bloomberg:

[OPEC Secretary General] El-Badri called for outside help to halt the plunge in prices. “All non-OPEC should come and help, it is a big burden for OPEC,” he told reporters. As well as Russia, “the ones we know that have the capability to cut are Norway and Mexico.”

Russia’s energy minister is expected to attend the Algeria meeting, El-Badri said. His plea for help elsewhere may fall on deaf ears after Norway, the world’s fifth-biggest oil exporter, ruled out production cuts earlier this month. “I don’t see any scenarios with regards to that,” Norwegian Oil Minister Terje Riis-Johansen said in a Nov. 18 interview.

Russia also seems unlikely to cooperate, given its dependence on oil revenues and the fact that it has already spent a fifth of its FX reserves defending its currency.

Some analysts also seem newly-skeptical of the likelihood of oil reaching higher levels any time soon. From Reuters:

$75 a barrel doesn’t look doable in the short term,” said Raja Kiwan of consultancy PFC Energy. “Given the fractious nature of OPEC on quota compliance, they may have some problems.”

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16 comments

  1. Alan

    Notice re Russia that production has been falling since the first of 2008, even with higher prices. The Russian practice of taxing away virtually all profit has left their oil production infrastructure in sad space.

    Combine this with the country’s complete inability to get external financing for its business operations, and you have a passive actor pumping as much as deteriorating internal conditions allow.

    Re OPEC not moving on its production targets. Has anybody noticed that OPEC long ago lost control of the price of oil? The bubble up to $147 and down to $50 reflected very supply and demand, despite the near universal protestations to the contrary.

  2. ruetheday

    Of course. All OPEC members are in favor of a production cut, so long as it is everyone but them doing the cutting.

  3. a

    Now would be the perfect time for the U.S. to implement a tax on oil or on energy. Alas, don’t expect it, because the economists are so unanimous in their desire for stimulus, that good policy will simply not be implemented.

    Yet another reason why we would be better off without any economists…

  4. joe c

    OPEC has never been able to set a floor on price. They’re good when supply is tight and they can tighten more and everyone enjoys price rise. When things are going down, it becomes every man for himself. $20 a barrel is not unreasonable if the economy continues to slow.

    That said, whenever the global economy picks up, and when that is, is becoming increasingly questionable, oil price will go up immediately with it. Every day expensive oil projects are now being canceled, many of which take years to get in place. So, we will meet supply limits very quickly on an upturn, this will not be like the 80s.

    Oil the foundation of 20th century industrial economy has now become a yoke on future economic development.

  5. Anonymous

    If the Fed were a commercial bank, it might be declared insolvent

    http://www.creditwritedowns.com/2008/11/if-the-fed-were-a-commercial-bank-it-might-be-declared-insolvent.html

    The Fed needs $48 billion in capital just to get back to the capital ratios it had last year.

    The current Treasury has so far struggled to keep up with the task of hiring enough people to handle the $700 billion financial rescue package passed by Congress in October. The man now in charge of running the Troubled Asset Relief Program, Assistant Secretary Neel Kashkari, said the department’s Office of Financial Stability, with about 40 full-time employees, is operating at half-staff.
    Federal banking regulators, who must approve the applications from banks before they go to Treasury, said there is a backlog of unprocessed applications for relief. Outside observers said the difficulty of quickly building a qualified staff may be one reason the Treasury abandoned its original plans to use the TARP to purchase assets from financial institutions, deciding instead to inject capital into the banking system.
    “I don’t think that was a small part of why Treasury in the end abandoned the asset-purchase program. It’s very people-intensive,” said Wayne Abernathy, executive vice president of financial-institutions policy and regulatory affairs at the American Bankers Association.

  6. Don

    Nigeria’s a rough place, and needs cash, I suppose:

    http://www.nytimes.com/aponline/world/AP-AF-Nigeria-Clashes.html?hp

    “The violence is the worst since the May 2007 inauguration of President Umaru Yar’Adua, who came to power in a vote that international observers dismissed as not credible.

    Few Nigerian elections have been deemed free and fair since independence from Britain in 1960, and military takeovers have periodically interrupted civilian rule.
    More than 10,000 Nigerians have died in sectarian violence since civilian leaders took over from a former military junta in 1999. Political strife over local issues is common in Nigeria, where government offices control massive budgets stemming from the country’s oil industry.”

    That’s right. 10,000 people in 9 years.

    Don the libertarian Democrat

  7. M.G.

    Is OPEC feeling the end of US dependence on petroleum?
    From 147 to less than 50 in few months could destroy any cartel.

  8. Anthony J. Alfidi

    How can OPEC lose power in an age when Norway and Mexico’s giant fields are peaking? This distress may be short-lived. OPEC’s ability to enforce production cuts will be enhanced if other producers are unable to pump more because of peaking production. The would-be quota violaters might even be grateful for the windfall.

  9. Anonymous

    Money Supply, Paul Krugman, and the Great Depression

    great ideas

    The Fed’s power, its influence, is profound, and ever moreso in this era of aggressive financial engineering. Krugman uses that narrow argument to point to the Adjusted Monetary Base as his sole metric and say, “See the monetary base went up in the Depression in his Chart 1, just as it is today in Chart 2. Therefore there was no error from the Fed at that time because it was all that they could do.”

    Everybody losing mojo!

  10. Anonymous

    Outside of producing Oil, the members of OPEC, have little in common with each other. The Iraqi/Iran war was just the most obvious example of the hatred they have for each other.

    I think it helps the Saudi power in the region to have prices lower. They know it hurts their main rivals and are smart enough to see the world needs cheaper oil to help over come the weakening economy.

  11. mxq

    Via IHT:

    “Over the past decade, OPEC has stepped in three times with large production cuts to stop prices from falling – in 2001, 2003 and 2006.

    Only once, however, did producers fully comply with their pledges to trim their output, according to analysts at Barclays Capital.

    When prices last fell toward $50 a barrel, at the end of 2006, members of the cartel agreed to cuts totaling 1.7 million barrels a day but they cut only 900,000 barrels a day, according to Barclays….

    Even if OPEC agrees to reduce its output further, it is doubtful that oil will rebound soon. In the past, it has typically taken three to six months for oil prices to rise after OPEC trims supplies, according to Deutsche Bank.

    “In terms of crude oil, we believe downward pressure on prices is likely to persist throughout next year,” according to a report by Deutsche Bank. “OPEC will struggle to cut production as fast as world growth is slowing over the next 12 months.”

  12. Lune

    How much of this is related to Saudi Arabia no longer having any reserve pumping capability? It used to be that Saudi Arabia had 1-2mil bpd reserve capacity that it could turn on at any time. This helped 2 ways:

    1) It could smooth over demand shocks, such as the first Iraqi war, and lessen volatility in the markets

    2) It allowed Saudi Arabia to wield a big stick to the other OPEC producers. If other members weren’t adhering to quotas, SA could open the spigots and flood the market, driving prices even lower until the rest of OPEC cried uncle and agreed to abide by their quotas. Since SA is the lowest cost producer, such a move would be less painful for itself than for other producers.

    Anyway, the major reason for Saudi Arabia’s influence in OPEC and world oil markets isn’t its vast reserves per se, but because it was the only country with any significant reserve capacity. Now that that reserve capacity no longer exists (SA pumps pretty much as much as it can with its current infrastructure), it can no longer act as the world’s oil liquidity source, nor as OPEC’s default enforcer. This may be a significant reason in the decline of OPEC’s power.

  13. freude bud

    Well, OPEC already cut production allocations by 1.5 mb/d on 10/24 effective 11/1. Most surveys and other data suggest that production and effective supply are down significantly.

    PFC Energy released a report a couple weeks ago that suggest that the number needed to support the Saudi budget in 2009 was a little over $50/b. Evidently in a meeting of 27 or so national oil companies in Beijing in October, the general estimate was that oil would go to $40/b. The mood was characterized as “panic.”

    If $50/b is what Riyadh needs, they may well choose to cut quotas further in December. (The Kingdom recently suggested that $75/b was a “fair price”.)

    Saudi Arabia has the ability to unilaterally cut enough to push up the price … but a cut should not have an immediate effect as stock levels are very high (crude stocks in the US went up over 7 million b Friday before last) and developed-world demand is down. If all available storage is taken by the time a cut is announced, it could take longer to have an effect.

    If Russia coordinates, and there have been some noises, the markets would probably respond more quickly.

  14. Juan

    Lune, have you considered that Saudi excess cap may not be such public knowledge as so many seem to assume?

  15. annie

    That said, whenever the global economy picks up, and when that is, is becoming increasingly questionable, oil price will go up immediately with it. Every day expensive oil projects are now being canceled, many of which take years to get in place. So, we will meet supply limits very quickly on an upturn, this will not be like the 80s.CitiDirect.co.uk is United Kingdom's premier online business directory allowing customers to search for businesses in their local areas. The search can be conducted according to type of business, its name or its location.

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