Which Non-OPEC Producers Can Be Expected To Cut?

Jerri-Lynn here: The following post summarizes the state-of-play regarding production cutbacks for twelve oil-producing states invited to participate in the Organization of Petroleum Exporting Countries’ (OPEC) ongoing discussions regarding a much-anticipated output freeze. As the post suggests, failure to agree restrictions and stabilize prices might heighten the risks of terrorist attacks and political instability in some of the non-OPEC countries invited to participate in wider negotiations. Yet inviting new participants to the negotiating party is only likely to complicate the situation and slow further the implementation of an internal production reduction already delayed for nearly a year.

By Zainab Calcuttawala, an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on international trade, human rights issues and more. Originally published at Oilprice.com

Last week, Venezuelan oil minister Eulogio del Pino released a list of states invited to participate in the OPEC ongoing negotiations regarding a much-anticipated output freeze.

Russia, Egypt and ten other oil exporters made the list, though the high variation between the economic and political standings of the non-OPEC participants add to the already complicated and delicate orchestration of the deal— if there is to be a deal, that is.

This past weekend, several of the invited non-OPEC countries sent representatives to Vienna for consultations regarding the terms of a potential freeze deal. No details have been finalized, but those who participated agreed to meet again before the 30 November OPEC summit.

Russian President Vladimir Putin and Energy Minister Alexander Novak have recently agreed to freeze output in coordination with OPEC, if the group’s members can flesh out a plan amongst themselves.

According to OPEC Secretary-General Mohammed Barkindo, the bloc is on track to deliver a deal by the end of November. Barkindo also said that Russia has agreed to participate in OPEC’s official meeting this month.

As outlined by the Jamestown Foundation last month, Kazakhstan is desperate for a freeze deal to help economic development rebound to the 6-7 percent expansion rate that the former Soviet Republic saw when barrel prices exceeded $100. But just because they are desperate for a cut doesn’t mean they will participate.

Kazakh Energy Minister Kanat Bozumbayev said on Tuesday that Kazakhstan itself would not be doing any cutting, because, according to Bozumbayev, their production levels are small in proportion to some of the others at the negotiating table, namely Russia, Saudi Arabia, Brazil, Iran, and Mexico.

This year, Kazakhstan does not expect its economy to grow more than 0.1 percent, while 2017 forecasts from the World Bank predict a low one-percent increase in GDP. Kazakhstan – which recently reopened its Kashagan field, depends on oil exports for over 60 percent of total government revenues and a quarter of its GDP.

A failed deal could mean renewed terrorist attacks and political instability for Kazakhstan as the Kazakh economy continues to spiral downwards.

Asked what he hoped Saturday’s meeting would achieve, a Kazakh official in attendance in Vienna desperately said: “We just hope the price will react and it will increase.” That desperation is shared by many other oil-dependent countries, but this desperation is also a sign that these countries are not in any position to scale back the production that generates the most revenue.

Azerbaijan was also at the table. Halfway through October, Azerbaijan – a country that produced more than half of the world’s oil a century ago – also announced its support of an OPEC/non-OPEC cut, which, as ClipperData noted, is convenient because the country’s September oil production was 10.2 percent lower than its August rate.

“Venezuela and Azerbaijan agree that some measures will be taken to stabilize the market,” Azeri Energy Minister Natig Aliyev said this weekend. “We agreed the price of oil can be around $60 per barrel.” Statements revolving around price, however, do not speak to who is ready to share the burden of cutting production, and do little to assuage market fears that a cut is but a wispy goal.

Oman wasn’t buying the feasibility of OPEC cuts either, and before the Algiers meeting in September, Oman said as much, stating that it did not believe in the bloc’s ability to solve the pricing crisis due to several failed efforts to freeze output over the past year.

Newer reports on Oman show that they officially support an output freeze and overall reduction, with the expectation that “similar measures be taken by other countries.” It remains unclear if Iraq, a war-torn nation currently defying production limits, and Iran, a country trying to regain its legs now that sanctions were lifted, count as one of the “other countries” that Oman expects to cut output.

As a net oil importer, Egypt does not have the market power or political capital to sway the momentum of a freeze one way or another. The North African country’s recent spat with Saudi Arabia – the de facto leader of OPEC – over suspended petroleum shipments will also limit the salience of Egyptian interests in the bloc’s proceedings.

Sources from the Egyptian Parliament say the country’s energy ministry will be asked to review Saudi Aramco’s five-year agreement to supply Egypt with petroleum derivatives in the coming weeks, further complicating relations between the two nations.

Ninety-nine percent of Canadian oil exports go straight to the United States, according to governmental data from the buyer and seller countries.

Neither of the two North American countries is part of OPEC, and they have their own agreements for energy supplies. So even though Canada has been invited to participate in the freeze talks, the country does not have the economic or political incentive to reduce output.

Brazil elected to “observe” Saturday’s meeting as the country prepares to increase production rates over the next few years. This makes them extremely unlikely participants in any efforts to scale back production.

Other countries present this weekend included Mexico, which has spent the better part of this summer building a hedge against low oil prices for the next fiscal year.

Small-scale producers such as Bolivia and Trinidad and Tobago have already turned down production over the past two years, which had a limited effect on market fundamentals.

Norway, a 1.6 million barrel per day producer that has increased output by 2.1 percent in 2014 and 3.08 percent in 2015, declined to meet with OPEC over the weekend.

The geopolitics of oil within OPEC has already delayed the implementation of an internal production reduction for almost an entire year. By adding new nations from previously uninvolved continents (North America and Europe), the bloc has flooded the negotiation table with new interests – creating a fresh slate of diplomatic obstacles to overcome before an output freeze can be implemented.

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  1. Jim Haygood

    Venezuela and Azerbaijan agree that some measures will be taken to stabilize the market,” Azeri Energy Minister Natig Aliyev said this weekend.

    Brings back memories of ten years ago, when Azerbaijan was riding high and Baku was a boom town. A snapshot of that era was captured in Gary Shteyngart’s novel Absurdistan

    “Absurdistan is not just a hilarious novel, but a record of a particular peak in the history of human folly. No one is more capable of dealing with the transition from the hell of socialism to the hell of capitalism in Eastern Europe than Shteyngart, the great-great grandson of one Nikolai Gogol and the funniest foreigner alive.” –Aleksandar Hemon

    By contrast, no one writes comic novels about Venezuela … because it hasn’t transitioned from socialism, and it just isn’t funny as babies starve. Venezuela’s bolivar crashed 22% in the past week. Chart [up means weaker vs USD]:


    Dozens of countries have been affected by the halving of oil prices, including rich Norway which had to make a withdrawal from its oil fund, and rich Saudi Arabia which had to float some bonds. But it’s only a handful of chronically mismanaged economies that find their backs against the wall and their currencies in flat-out collapse, as the risk of food riots looms.

    1. Alejandro

      Up early, with the predictable red herring to set the tone of the thread? “[B]abies starve”? Really? Misinformed {Either-OR} disingenuous?

      Why “write comic novels about Venezuela”, when there’s JH’s commentary? I’m not sure you could define “socialism”, even if you tried, but I would love to read you try…and regurgitating Rothbard’s straw man doesn’t count, unless you can clarify with referents. That “chart” can easily be correlated to {hyper} OPEC oil production…also notice {price} as an effect of geo-politics, and not {cattalactics} as presupposed by many…

      According to you, “well managed” means dipping into savings (oil “fund”) {Either-OR} borrowing (“float some bonds”)…but if you depend on oil exports and the {price} remains ‘low’, then eventually the savings(“fund”) is depleted {Either-OR} you exceed your debt carrying capacity, especially given the fact that you are not the ISSUER of the currency USED for import/export…then what, austerity?

      If “Inflation” can be viewed as feedback of spending(in your currency) beyond your economic capacity, then {“hyper-inflation”} can be viewed as ignoring the feedback and/or lacking the authority/power to tax.

      “Hind-sight is 20/20”, and “it’s” full of lessons…and applying the lessons with foresight seems always the challenge.

  2. PlutoniumKun

    Sounds like acts of desperation. Only SA can really make the sort of meaningful cuts that will raise prices. And if they do manage to get it to $60, then lots of US tight oil will be released. They really are in a bind. Couldn’t happen to a nicer bunch of folks.

    1. Cry Shop

      On the other hand, cheap oil just makes it easier for nearly everyone to keep burning it profligately, so in the end it’s happening to all of us, and yet again you are right: that 4+ degree average temperature rise could not happen to a nicer bunch of folks.

      1. PlutoniumKun

        I’m actually surprised at how little impact low oil prices are having on demand and on investment in renewables. Its obviously given US SUV’s another little lease of life, but in overall terms the drop in the price of renewables has kept the momentum in their favour going, albeit at far too slow a pace. In Europe, I think the diesel scandal has done more to boost battery cars and hybrids than the high price of oil a few years ago. It seems to have pushed most car companies to believe that hybrids are the ‘transitional’ future technology, so at least its stopped them pushing diesel as a lower CO2 alternative.

        I think the jury is still out as to which is better for renewables – high or low oil prices. In theory (i.e. conventional basic level micro theory), high oil prices should do the job, but in reality what seems to have happened is that it has reduced the amount of money available for renewable investment, and pushed it to unconventional hydrocarbons instead. Low oil prices might actually kill the oil industry faster than high prices. Here’s hoping.

        Still too late for our climate though unfortunately.

        1. Jim Haygood

          Its obviously given US SUV’s another little lease of life

          And pickups, even more so. Light-duty trucks, including some SUVs and crossovers, accounted for over half of US vehicle sales in the first half of 2016.

          Many of them are gargantuan, weighing in at five or six thousand pounds. Yesterday at the post office I watched a woman clamber up the side step of her giant pickup to reach the floor level, probably two feet off the ground.

          Elegant? Not really. But chivalry doesn’t require helping damsels into their turbocharged V8 crew cab monster trucks.

          I take the same dim view of these rumbling dinosaurs as I did of the 1969 “land yacht” Chrysler station wagon, with its billowing yards of sheet metal finished in bold contemporary tones of avocado and coppertone brown.

          Small is beautiful …

        2. Cry Shop

          Cheap oil has made a huge impact on both airfreight and the development of spread industrial centers serviced by huge container fleets, all possible because a 5-15% savings in manufacturing costs more than offsets the cost of dirt cheap energy to ship the goods. Even relatively low end fashion textiles are now frequently shipped by air, the cost of which has gone negative by about 30% over the last 20 years before factoring inflation.

          Cheap energy made cotton and petrochemical textiles cheap, even steel, developing the throw away consumer business. Nucor almost went bankrupt because of the cheap cost of quality virgin steel vs. lower quality recycled steel.

          1. PlutoniumKun

            Yes, I think its in air transport that its had the biggest impact. The air industry was on its knees until released by the big drop in price a couple of years ago. I send things to friends in China and Bhutan and its noticeable that the cheapest postal rates are now being delivered much faster – I assume because air freighting has become the norm, not an expensive extra.

            I’m not so sure about other forms of transport. As Lamberts links in water cooler show, it does seem that shipping seems to be decoupling from economic growth. I suspect that this is a lagging indicator from the previous oil price spike. Manufacturers are seeing shorter supply chains as less risky so they are not distracted by current cheap prices in their longer term plans. It only needs a couple of riots in Riyadh to change things radically.

  3. Chauncey Gardiner

    Thanks for the state-of-play analysis. In my opinion price and production pressures on OPEC and other oil producing countries are intertwined with high levels of debt globally. Until the debt overhang is addressed, supply and demand will work against oil producing nations.

    Cheap and abundant energy is key to global economic growth that is in turn required to both pay interest on massive levels of legacy debt and to support an increasing global population. It is no accident that an oil glut emerged and coincides with high levels of debt.

    I see three avenues of resolution for creditors, debtors and oil producers out of this systemic conundrum assuming maintenance of the monetary status quo and that resolution is desired. Policies need not be mutually exclusive:

    1.) Keep real interest rates negative (Slow motion debt writedowns);

    2.) Keep oil prices low, continue to ignore climate change, seek to restore global economic growth while containing further debt growth;

    3.) Massive and rapid write-offs of legacy debts.

    … Isn’t this the reason why we have supranational organizations?

    1. John k

      The purpose of supranational orgs is to protect creditors such as banks and super rich, though an unintended byproduct is that this also protects retirees.
      Writing down debt is a revolution…
      Of course, a central bank can purchase defaulted debt and knock down the interest rate to zero, allowing people to stay in their homes… Not a high priority in 2008, or now, maybe next time some genius will think beyond the banks…

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