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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