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Crude Economics
Oil Prices Hit Four-Year Low, OPEC Does Nothing

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.

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  • TheCynical1

    Early September: the U.S. announces it would begin airstrikes in Syria. The Saudis have long wanted U.S. involvement in Syria.

    Early September: oil begins its drop below $100, which the Saudis are content to allow and even encourage. This puts pressure on Putin, which the U.S. likes. Also, this puts pressure on Iran, which the U.S. likes too. (The Saudis also like the pressure on Iran, for their own reasons.)

    Just a coincidence, I’m sure.

    • Corlyss

      I was going to say something similar. The nations that the craven Saudis depend on to save their worthless butts need low oil prices to help them afford Saudi “friendship.” Nothing would please me more than to see ISIS on the rampage in Saudi Arabia or Qattar. My undiplomatic response would be “Daddy Rabbit, meet your progeny . . . “

  • Jacksonian_Libertarian

    “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).”

    This is a dated number, this blog showed a graph of skyrocketing oil production per well in a recent article but is here using production costs that are several years old. Also, since the graph showed such a strong increase continuing we know American producers are already structured around ‘cost cutting and production increases’ unlike the stagnate and decaying state owned monopoly oil companies of OPEC. We can expect the OPEC producers to lose market share long before American producers even start to slow development. Also remember that American producers have a captive market connected by pipelines and any imported oil has to be first shipped at an increased transportation cost. With production at 12 million barrels a day, and consumption at 18 million barrels a day transportation costs of American oil will not be increasing anytime soon.

  • TheRadicalModerate

    This almost sounds like the petroleum version of a liquidity trap. Any attempt to raise prices does two things that OPEC can’t afford:

    1) It throws Europe into a more extensive recession than it’s already in, resulting in the price falling–so raising prices does nothing.

    2) It encourages US producers to bring more fracked oil online by signaling a shortage, which further erodes OPEC’s power–so raising prices does worse than nothing.

    Fracking and horizontal drilling really have changed everything. It’s no longer about who has the reserves. It’s only about who can produce the most cheaply.

  • PDX_traveler

    there is of course another reason, which is not mentioned here I think. The Saudi’s do not want to lose control of the oil market – they especially want the US to have a sizeable stake in the Mideast oil import business, and they would like to pressure North American producers (whose breakeven price is conveniently not mentioned here). At some price, the North Am. E&Ps will buckle, and the Saudis regain some control.

    • PDX_traveler

      and yes, I am a dummy for not reading down to the last paragraph more closely, where the NA breakeven is reported. But, my point still remains..

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