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Crude Economics
Nigeria Itches For OPEC Action

The price of oil has halved over the last eight months due to a global oversupply and slack demand, and so far OPEC has seemed content to leave things as they are. In the past the cartel has cut production to set a floor for falling prices, but this time Saudi Arabia—the only producer capable of lowering output enough to affect prices—has opted to ride out the plunge in order to compete with upstart American shale producers for market share. The Saudis have a sovereign wealth fund large enough to ride out another two decades of prices this low, but other OPEC members are feeling the pain much more acutely. In fact, just this week Nigeria’s oil minister said she might soon call an emergency meeting, the FT reports:

“Almost all Opec countries, except perhaps the Arab bloc, are very uncomfortable,” said [Nigerian oil minister Diezani Alison-Madueke], who as president of Opec is responsible for liaising with member countries and the producer group’s secretary-general in the event of an emergency meeting.

If the price “slips any further it is highly likely that I will have to call an extraordinary meeting of Opec in the next six weeks or so”, she said in an interview with the Financial Times. “We’re already talking with member countries.”

OPEC members all depend on oil revenues for huge portions of their government budgets, but few are as well prepared to weather low prices as the Saudis. But those countries are essentially junior partners in OPEC, and without Saudi approval the kinds of production cuts that Venezuela and Nigeria would like to see simply aren’t going to happen. In fact, unless Riyadh significantly rethinks its strategy in this bear market, it seems unlikely that the kind of emergency meeting Alison-Madueke floated will ever happen.

The next scheduled OPEC summit isn’t until June, and it’s not clear that the Saudi calculus will change by then. Fissures are widening, and the cartel’s cohesion will continue to deteriorate as its members become more and more desperate.

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  • Brett Champion

    The non-Arab members of OPEC might now like what’s going on, but there’s little to nothing they can actually do about it. Essentially what they want is for the Saudis to cut back on their production substantially so that the amount of revenue they generate from their sales increases. This isn’t about them wanting OPEC to cut production, but about them wanting Saudi Arabia to cut production.

  • Andrew Allison

    It’s far from clear that Saudi Arabia is driving prices down to compete with upstart US shale producers. for example, shows that between 2001 and 2011, Saudi Arabia lost significant US market share to Canada, a relatively high-cost producer. Meanwhile, US imports have declined for a variety of reasons (increased production, substitution by natural gas and fuel economy), increasing the pressure on import market share. Then there’s the question of the impact on the highest breakeven-cost producer (Iran). Finally, I can’t belief that the Saudis are not aware that existing shale producers have a break-even price roughly that of the current price, and falling.

    • LarryD

      Oil is mostly fungible (I say mostly because US refineries are the only ones capable of handling Venezuela’s heavy crude). The Saudis are accordingly worried about the world market, not their specific share of US imports. US’s increased production has had a negative impact on the world market price, and that they are concerned about. Their public position is that they are trying to ride out the down-turn in the expectation the US producers will have to reduce production. Noting that this down-turn hurts Russia and Iran even more than it pinches the Saudis, and that the Saudis have no love for either, I think this could be about taking the wind out of their sails more than world oil market share. Of course, the Saudis can’t admit to that, so their rhetoric is about market share. If I’m right, the Saudis will keep this up longer than FriendlyGoat expects.

      • Andrew Allison

        Either way, US shale producers are pretty clearly not the target and, as you suggest, the Saudis seem likely to keep on pumpin’.

  • iconoclast

    Saudis are making a lot of the world very angry (Iran, Russia, Venezuala, Nigeria). I wonder how their anger will play out in the New World Disorder.

  • Fat_Man

    It is not clear to me that OPEC has had any effect on world market prices an availabilities for petroleum since the one moment in 1973 when they had the world by the short hairs. The latest price drop, which seems to have stabilized ~$50/bl. is in my estimation more about North American production and the strength of the dollar than any cartel action. Further, I don’t think there is anything the cartel can do about it.

  • FriendlyGoat

    The Saudis are unlikely to sit around for two decades and watch their sovereign wealth fund go down and down. They will be making decisions much sooner. They are either seeing their present strategy work “well” for them, or they’re not. I suspect it’s “not”.

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