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Crude Economics
How Long Can OPEC Keep It Together?

These are bad days to be in the business of selling oil. Or, maybe more accurately, they’re worse—much worse—than they were as recently as the summer of 2014. Brent crude, the stand-in benchmark used to describe the “global” price of oil, is trading today just above $48 per barrel, less than half of a high above $117 in June of last year. The price plunge has pinched the budgets of the world’s petrostates, but OPEC—led by its largest producer Saudi Arabia—has chosen not to cut production as it has during tight times in the past. Its strategy this time hinges on non-OPEC producers’ responding to market forces before petrostates run too far into the red, but some of the cartel’s more at-risk members are not pleased, to say the least, with the waiting game. Bloomberg reports:

Venezuelan President Nicolás Maduro said on Sept. 16 that he was making progress on organizing a summit of petroleum exporting countries…OPEC member Algeria is backing the Venezuela-proposed conference—as well as Maduro’s desire for a higher price. Venezuelan officials didn’t respond to requests for comment.

Maduro’s plans won’t pan out unless Saudi Arabia stops flooding the market. There’s no sign it’ll retreat from that strategy, which is helping it preserve and even gain market share. “OPEC is of no use today,” says former Algerian Prime Minister Ahmed Benbitour. “The war now is about market share, not price, and Algeria is getting no benefit from this organization.” OPEC declined to comment for this story.

Venezuela’s and Algeria’s complaints raise the question of why some members stay in OPEC if the Saudis call the shots and ignore pleas for higher prices. Neither Venezuela nor Algeria has made moves to quit. Not only is the group intact, but former member Indonesia is returning, boosting membership to 13 nations.

Saudi Arabia has a sovereign wealth fund worth well over half a trillion dollars that’s set aside to help endure times like these, but poorer OPEC countries like Venezuela and Algeria are in a decidedly different boat. Most petrostates took advantage of the prolonged period of high prices prior to the recent crash to boost social welfare spending to placate restive populaces, and they now face potential instability if they cut expenditures.

How long will OPEC be able to retain its membership if it continues to sit idle in the hope that high-cost producers will cut supply and send prices back up? With shale producers busy finding ways to boost production and increase efficiencies even at sub-$50 crude, there’s little reason to expect prices will rebound to the levels most OPEC members need to balance their budgets.

But, then, why haven’t countries like Venezuela or Algeria left already? As IHS analyst Jamie Webster put it, they “don’t leave because they still believe there could be something in the future where the group does make a decision…It’s much easier to just keep OPEC alive than to shut it down, and with it a key communication channel.” The Saudis have locked OPEC in to a game of chicken with America’s shale industry, but members are getting increasingly restive as prices still look unlikely to rise anytime soon.

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  • rheddles

    why haven’t countries like Venezuela or Algeria left already?

    What’s for lunch, Abdullah?

  • Fat_Man

    OPEC, like all cartels not organized by force (either civil law or a strong military power) collapsed in the early 1980s. Ever since then it has served as the bogeyman in the bed time stories that Washington tells us about its energy policy (ethanol producers, I am looking at you) .

    It is not relevant to the real world.

    • Andrew Allison

      It’s a cartel which is in the processes of disintegrating under the influence of a worldwide oversupply of oil. The Saudis are both determined to maintain market share and have more staying power than the others, who simply can’t afford to stop producing at whatever price they can get (a problem which is not unique to OPEC). Interesting times.

  • Andrew Allison

    This is a recording: there’s precisely zero evidence that “The Saudis have locked OPEC in to a game of chicken with America’s shale industry, . . .” When, oh when, will TAI grasp the simple fact that the Saudis will reduce production only in concert with the other members of OPEC (who can’t afford to curtail production).

  • dawnsblood

    Why would they leave? Leaving the group would not drive prices up even a little bit. They have nothing to lose by remaining in the organization and attempting to convince the others (the Saudis) to ease up. I’m not even sure why this was an important question.

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