The Organization of Petroleum Exporting Countries (OPEC) agreed late last week to extend oil production cuts through March 2018. But although the move led to a brief jump in oil prices, “the optimism may fade, as shale producers in the United States jump back into the market and the rise of renewables dims prospects for demand,” the New York Times reports.
“OPEC is being caught in a pincer movement of technology and policy that will, over time, erode oil use,” said Bill Farren-Price, CEO of Petroleum Policy Intelligence. So last week’s OPEC meeting in Vienna was “more about forestalling an oil price collapse than driving prices higher.”
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The Times cites the U.S. shale boom and the rise of the electric engines as key factors leading to the collapsing influence of the once-mighty oil cartel. “In decades past, an OPEC decision to curb or increase production had wide consequences and would move markets,” the paper notes. But more recently, “OPEC has used Band-Aids to get through crises of the moment,” said analyst Bhushan Bahree at IHS Energy. “It’s not clear they are willing or able to address the larger issues of the global market.”
Nor, it seems, have they got their messaging right. The Times had oil prices rising from a low of US$46 to about $55.25 per barrel after the OPEC announcement, then slipping back to around $53 (all for an industry that not too long ago took $100-per-barrel oil for granted). Reuters attributes the price drop—as low as $51 at one point—to OPEC setting unrealistic expectations for the supply cuts it planned to introduce.
“The problem was not what was delivered, but what appeared to have been promised beforehand,” the news agency notes, citing industry analysts. “OPEC agreed on Thursday to extend its existing production cuts by nine months—more than the initially suggested six months—in tandem with non-OPEC producers, including Russia. But hints from the group that it could deepen supply cuts, extend them by as long as 12 months, curtail exports, and tell the market how exactly it would terminate supply curbs in 2018 had raised market expectations much higher.”
So even though the meeting went well from the producers’ point of view, the market reacted badly. “OPEC oversold the meeting to the market way too early,” said consultant Amrita Sen of Energy Aspects.
Worse still, from fossils’ point of view, news analysis makes a convincing case that OPEC can’t do much more than postpone a continuing price crash. Goldman Sachs is already warning of a new supply glut as soon as OPEC increases production.
A big part of OPEC’s problem is the “astonishing” speed at which U.S. oil producers responded to a small increase in prices, financial journalist Carl Mortished comments in the Globe and Mail. The net result is that “Saudi Arabia is no longer able to manage the oil price by acting as a swing producer, opening or closing the spigot in response to the level of crude in storage,” he notes.
“This change is devastating for the OPEC cartel, which, according to the U.S. Energy Information Administration (EIA), has lost two-thirds of its revenue as a result of Saudi Arabia’s decision in 2014 to abandon price management and flood the world with oil in pursuit of market share.”
But the financial pain for countries like Saudi Arabia is nothing compared to the devastation facing Venezuela and Libya, both of which are seeing their economies collapse due to the loss of oil revenue.
“Peak demand for oil may bring with it yet more civil unrest, a huge social and political challenge for OPEC countries,” Mortished writes. “And we, too, must prepare ourselves for the consequences, as the victims of the collapsing oil-producing economies head north and west to seek refuge in our towns and cities.”