The price of oil is in a tailspin, hitting a four-year low in trading today and down more than 23 percent since June. Crude pricing is being buffeted by slowing demand in Europe and China, while new supplies from North America and Libya work to depress things from the other side of the equation.But as prices continue their downward plunge, OPEC has rather conspicuously not moved to cut production. In fact, the Saudis have cut the price at which they sell their crude in an attempt to gain market share, setting off a kind of price war: Iraq lowered the price for its oil over the weekend, while Kuwait’s oil minister hinted at a further drop in prices, potentially down to $76 per barrel. The Wall Street Journal reports:
Venezuela, which has been one of the most outspoken proponents of a production cut by the Organization of the Petroleum Exporting Countries, called over the weekend for an emergency meeting of the group to respond to falling prices. But Kuwait said Sunday that OPEC was unlikely to act to rein in output.Saudi Arabia, meanwhile, appeared to expand on its recent move to defend its market share at the expense of other members by aggressively courting customers in Europe. Traders said Saudi Arabia is now asking for stronger commitments from some of its buyers in Europe, a move that would lock in those customers, including any new ones it would gain with recent price reductions.Also on Sunday, Iraq’s State Oil Marketing Company cut the price of Basrah Light crude in November for Asian and European buyers by 65 cents to a discount of $3.15 a barrel below the Oman/Dubai benchmark for Asian customers and $5.40 below the Brent benchmark for European customers, according to official selling prices published by the company.
The petrostates that compose OPEC are united in their common interest in seeing oil prices remain high, but each member state has a different need for how high. That’s because the breakeven price, or the lowest price at which a petrostate can sell its oil and still balance its budgets, varies widely. Russia likely needs crude to trade at $100+ per barrel to stay in the black, while Venezuela needs a breakeven price of $121, and Iran as much as $140.OPEC’s inability to agree on production cuts, then, has some serious implications for the cartel’s members. It’s also a big boost for the U.S. economy, as a gas price cut of almost $1 per gallon would give consumers a much needed break. That oil prices would be falling even as the Middle East is in flames is partly due to the U.S. shale boom, but things could all go pear-shaped again if the fighting in Iraq spreads to the oil producing areas, or if political instability in any of the oil sheikhdoms cuts production.And finally, let’s not forget that America is affected by a bearish oil market. Fracking is expensive, and drillers will likely start having to cut production if crude drops into the $70–80 per barrel range (it’s trading around $85 today). But for now, U.S. shale is helping keep the pressure on the world’s petrostates. When OPEC next meets late next month, the world will be watching, and so will we.