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Crude Economics
OPEC Selling Oil at Six-Year Low

Too much supply and too little demand always means cheap prices, as any OPEC member could likely explain. The oil cartel hasn’t cut production in the face of falling crude prices over the last 17 months or so, choosing to compete for a share of the increasingly crowded market rather than setting a price floor to the market by restricting global supplies. Now, as Bloomberg reports, the group is reaping what is has sown as it sells its oil for less than $40 per barrel:

The daily OPEC Basket Price fell to $39.21 a barrel on Nov. 13, according to an e-mail on Monday from the organization’s secretariat in Vienna. The basket, an average of export grades from each of the group’s 12 members, typically trades below international oil futures as some OPEC nations pump denser or higher-sulfur crude that’s less profitable to refine. […]

OPEC’s annual revenues may be curbed to $550 billion at current prices from an average of more than $1 trillion in the last five years, Fatih Birol, executive director at the IEA, said in London on Nov. 10. Even Saudi Arabia, the group’s biggest member, faces a budget deficit this year that the International Monetary Fund predicts will exceed 20 percent of gross domestic product.

OPEC’s do-nothing strategy has been underpinned by a hope that non-OPEC producers would necessarily be forced to cut their own production in the face of declining prices as higher-cost projects no longer proved profitable. This approach has been championed by Saudi Arabia, which is the group’s largest producing member and therefore the best suited to act as a global swing producer and cut back on production in today’s oversupplied market. Instead, Riyadh has done nothing but pump crude with abandon, hoping to cede that role of swing producer to America’s high-cost shale companies.

We’re essentially watching an extraordinarily high-stakes game of chicken play itself out, as oil producers around the world continue to keep output up despite the fact that supply is outstripping demand by more than two million barrels of oil per day. For shale producers, the Saudi strategy creates a stress test that shrinks profit margins and tries the industry’s ability to innovate its way out of a problem. But for petrostates like OPEC’s members, this is putting strain on government budgets and even regime stability.

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  • WigWag

    It’s easy to celebrate low oil prices; none of us like paying more at the pump. But Saudi Arabia and the Gulf States may be far less resilient than anyone thinks; low oil prices might literally bankrupt these nations within a few years. The ramifications of the fall of the House of Saud should not be underestimated. Saudi Arabia and the Gulf Arabs singlehandedly support the economies of Egypt and Jordan. Without Saudi assistance, millions, if not tens of millions of Egyptians might literally starve to death.

    I hope all of the geniuses in both political parties who call the foreign policy shots for our country are paying attention. The implications of the fall of the Saudi Government are staggering.

    We better start planning for it now, before its too late.

    • Fat_Man

      I would rather feed the Egyptians than send money to the Saudis. They are a bad breed. They have been key spreaders of radical Islamism. We could make it a real win win. Terminate the corn ethanol program and have the government buy the corn and send it to egypt.

      • Jacksonian_Libertarian

        I would rather the whole Islamic Culture grew up and took care of themselves, instead of being a criminal culture that supports the Murder, Rape, Robbery, and Enslavement (yes Slavery), of all Infidels and Apostates. Polls show that as much as 40% of Muslims support the criminal activities of the Jihadists. That’s 400,000,000 people out of about 1 billion Muslims, how and why should Americans or the Western civilized nations help these barbarians? Even the oil that enriches many Muslim dominated countries, was found, developed, and used by westerners. All this talk of a “Religion of Peace” and an “Old and wise culture” is all lies. Islamic Culture is a violent, backward, criminal culture, and it treats everyone else like beasts of burden.

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