OPEC Stands On Production Rates, Oil Prices Plunge
Crude oil prices fell to their lowest levels since the 2009 global recession in early-December, pummeled by the fading chance that Saudi Arabia would cut production to halt the commodity’s yearlong slide.
In only 16 months global oil prices have collapsed from over $110 a barrel to less than half that, and the oil industry in the United States and around the world is reeling from its worst crisis since the late 1990s. On December 7, the American benchmark broke the $38-a-barrel mark, a price that makes drilling and completing wells a losing proposition in almost all oil fields around the country.
Oil stocks were sent tumbling, along with the rest of the market, as the price plunge put additional pressure on their finances. A variety of factors is behind the price drop, analysts say, including the surge in American and Iraqi oil production in recent years and a slowing in demand growth from China and other developing countries.
But it was the decision by the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia and a few Persian Gulf allies, in November 2014 not to cut production to shore up prices as it often had in the past, that sent prices into a collapse.
Previously, traders and oil executives held scant hopes that maybe Saudi Arabia would listen to the urging of several OPEC nations like Venezuela, Iran, Ecuador, and Algeria to cut production, and that maybe Russia and some other non-OPEC producers would join in the effort. But those hopes were dashed on when OPEC refused to tinker with its output, which is now at near-record levels.
The Saudis’ actions are having the effect of forcing companies to reduce their shale production in the United States, which though expensive, has nearly doubled American oil output in recent years. The shale revolution, a relatively recent phenomenon, also threatens to increase production in many other countries that can eventually drill into their own hard rocks.
At the same time, cheap oil and gas have depressed the U.S. fuel economy ratings. Drivers, without facing the urgency of high prices, have opted for more and larger vehicles, rather than entertaining consideration of more sustainable options.
OPEC officials said that before they made any decision about future production cuts, they wanted to see the impact on global markets of new barrels from Iran — expected to be as many as 500,000 a day by the second half of 2016 — as Tehran complies with the recent nuclear deal. They also suggested that Saudi Arabia might be willing to cut as long as other major producers were willing to do the same.
Many oil analysts have compared the Saudi strategy to a game of chicken to see which large producers would blink first. But the strategy holds risks for Saudi Arabia, which relies on oil for 85 percent of its exports and much of its government financing.
Though the Saudis continue to have hefty reserves, the International Monetary Fund has warned that they could run out of cash in five years because of the reduced revenues and high social spending they rely on to keep domestic peace.