Are we watching the death of OPEC?

13 posts / 0 new
Last post
krogoth's picture
krogoth
Status: Platinum Member (Offline)
Joined: Aug 18 2008
Posts: 576
Are we watching the death of OPEC?
Are we watching the death of OPEC?

The fundamental problems of the once-mighty Organization of Petroleum Exporting Countries are being laid bare by falling prices and production cuts.

By Jim Jubak

Is this the end of OPEC?

The plunge from $148 a barrel to $50 a barrel in less than five months has opened huge fissures in the Organization of Petroleum Exporting Countries. Some members, such as Iran and Venezuela, are desperate to raise oil prices so they can balance their national accounts. More-conservative members, such as Saudi Arabia, can balance their budgets even at current prices and have room to fear they will be the scapegoats if the global recession deepens.

We've sat deathwatch for OPEC before, but this time the cartel's future looks especially bleak. Its Nov. 29 meeting in Cairo, Egypt, ended with members deeply divided. The Venezuelas and Irans of OPEC have dug themselves into such a big spending hole that their only way out would be for OPEC to raise prices by cutting production while letting the cartel's hardest-pressed members cheat.

OPEC couldn't agree on any production cuts in Cairo but promised to revisit the issue Dec. 17. The burden of production cuts would fall almost totally on the Saudis and other conservative Middle Eastern oil producers. That's why the Saudis didn't buy into that deal in Cairo and why they might balk again. That result could leave OPEC standing but effectively end the cartel's power to change the balance of global supply and demand.

In the short run, that would be great for consumers. In the long run, it would lead to global energy chaos.

Where oil demand is growing

How did OPEC get into this mess? Consumers in OPEC countries are becoming just as addicted to oil as their counterparts in the United States. According to the latest forecast from the International Energy Agency, oil demand from the world's developed economies will fall by about 3 million barrels a day between 2007 and 2030. In that same period, the countries of the Middle East will be one of the three major sources of oil-demand growth in the world. Overall, about 43% of global oil-demand growth will come from China, according to the forecast, with India and the Middle East contributing 20% each.

 

  • Talk back: Would OPEC's demise be a good or bad thing?

 

It's easy to understand why China's and India's oil demand is growing so fast. They have immense populations -- 1.3 billion and 1.1 billion, respectively -- and emerging middle classes that are just starting to buy cars and the other high-consumption trappings of developed economies.

But the Middle East? Egypt, the most populous country in the region, has just 80 million people. Iran, 70 million. Saudi Arabia, just 27 million. So why are these countries projected to add as much to global demand for oil as India over the next two decades?

  • Demographics certainly play a part. These are some of the youngest and therefore fastest-growing economies in the world.

 

  • National investment plans heavily favor oil- and energy-intensive projects, such as chemical plants.

 

  • And subsidies. In 2007, Iran spent almost $20 billion more on energy subsidies than China did. Three Middle Eastern countries -- Iran, Saudi Arabia and Egypt -- make the International Energy Agency's global top eight for energy subsidies in the developing world. Another OPEC member, Venezuela, also makes the top eight. That group is rounded out by China, India, Indonesia and Russia. Subsidize oil prices, and consumers will buy and consume more. Pretty simple.

Governments hooked on oil

The governments that provide these subsidies are even more hooked on oil than their populations are. Politicians in oil-producing countries have gotten used to oil revenue providing the bulk of the national budget, enabling them to keep taxes low and expand services. In Iran, for example, oil revenue provides between 40% and 80% of the national budget, depending on which oil industry analyst you believe. In Nigeria, oil and natural-gas revenues account for 85% of government revenue.

 

No problem with that -- until oil prices start to fall. Governments that pegged their budgets to $80- or $100- or $120-a-barrel oil are in deep trouble when oil falls to $50. Russia, for example, developed its national budget for 2008 based on $70-a-barrel oil.

According to consulting company PFC Energy, the United Arab Emirates, Algeria and Qatar would be the only OPEC nations able to balance their accounts in 2009 with oil below $50. Saudi Arabia would need oil prices just over $30 a barrel, according to Merrill Lynch, or slightly more than $50 a barrel, according to PFC Energy.

In contrast, Iran needs a price of $90 to $100 a barrel to break even in 2009. And because of President Hugo Chávez's soaring spending on social programs, Venezuela needs an oil price somewhere between $60 and $120 a barrel; the consensus seems to be somewhere around $90. On Nov. 24, Chávez told a news conference that $80 to $100 a barrel would be a fair price.

Investors are starting to worry about where all the money will come from for bonds. Governments need to sell $2 trillion in bonds in 2009 to pay for bailouts and stimulus packages. Jim Jubak wants to know who will be buying.

2 possible solutions

There are really only two ways out of this bind:

 

  • A government could, of course, cut spending and live within its means. (No, I mean it. That's not a joke. Stop rolling on the floor.) That's no more likely among the ranks of oil-producing countries than it is in the good ol' U.S. of IOU.

 

  • OPEC as a whole could cut production, raising global oil prices, while allowing the most hard-pressed countries to cut production only minimally. A cartelwide reduction in production might be able to raise prices, but that wouldn't solve the problem confronting Nigeria, Iran, Venezuela and the like. To fill the hole in their budgets, they need to see oil prices climb and to keep pumping at current rates.

 

Continued: Taking (another) one for the team?

The problem confronting OPEC is that it increasingly looks like it would take huge production cuts to just stabilize the price of oil. OPEC agreed to cut production by 500,000 barrels a day in September and then an additional 1.5 million on Oct. 24. It now looks like those two promised cuts -- not completely carried out -- reduced production in November to 30.98 million barrels a day, down from 32.2 million barrels a day in October.

Even cuts of that magnitude haven't stemmed the decline in the price of oil, however. And now some OPEC members are calling for production cuts of at least 1 million more barrels a day and perhaps as much as 2.5 million.

Taking (another) one for the team?

The burden of the cuts so far has fallen most heavily on Saudi Arabia. The Saudis accounted for about 44% of November's projected production cuts. And as OPEC's biggest producer, Saudi Arabia would be expected to pick up the bulk of the next round of cuts, too. The Saudis produced 9.45 million barrels a day in September. That's roughly a third of OPEC's total production.

 

OPEC's Nov. 29 meeting showed that the Saudis aren't yet willing to step up to the plate with another 500,000- to 1-million-barrel-a-day cut in production at a time when the government is announcing cancellations and delays in its plans to diversify the Saudi economy. Adding up all the cuts actually delivered showed that OPEC had cut production by only 850,000 to 1.2 million barrels a day instead of the 1.5 million promised in October.

And the Saudis seem convinced that Iran, OPEC's second-largest producer, and Venezuela have cut their output by less than they claim. No wonder that the Saudis wanted to wait for more production data before agreeing to further cuts. If what the Saudis hear, or think they hear, is that they've made cuts but that other OPEC members have reneged on their promises, then you can expect them to agree on Dec. 17 to cuts that are much less than Venezuela and Iran are talking about.

The Saudis also got in a not-so-subtle dig at Iran and Venezuela at the Cairo meeting by calling for a $75-a-barrel price for OPEC oil. That would be a huge improvement from current levels but noticeably short of the target championed by Venezuela and of the $90 to $100 a barrel that many experts believe Iran and Venezuela need to balance their budgets.

OPEC's inability to agree on any additional production cuts in Cairo means oil prices will fall further and that the problems confronting the governments of oil producers such as Nigeria, Venezuela and Iran will ratchet up toward crisis. That would pressure OPEC to do something dramatic at its Dec. 17 meeting.

Where Russia fits in

At the same time, the lack of production cuts in Cairo will increase short-term pressure on Iran and Venezuela to cheat on the October production targets and keep production above quotas. (Due to a near civil war in its oil fields, Nigeria's production is falling with or without OPEC quotas.) That, in turn, will make the Saudis even less likely to want to cut production to bail out OPEC members who haven't kept to their quotas.

 

Even though it isn't an OPEC member, Russia will play a big part in deciding how the future of OPEC plays out. Russia, which produces roughly as much oil as Saudi Arabia, has made noises about coordinating its production policies with OPEC. So far, those noises are exactly that, and the country shows no signs of following OPEC's lead by intentionally cutting production. The sight of a non-OPEC Russia taking advantage of improvements in oil prices created by Saudi Arabia's cuts in production will just increase Saudi resistance to disproportionately sacrificing for the profit of others.

If the September and October production cuts don't do the job (and almost nobody in the oil industry thinks they will) and OPEC goes into its Dec. 17 meeting faced with tumbling oil prices and massive quota flouting, the cartel could slip into public disagreement. An increased level of suspicion and recrimination entering 2009, a year that will see massive budget distress for many OPEC countries, could make it impossible for OPEC to agree on any course of common action.

A shadow of its powerful self

That wouldn't be enough to cause the formal breakup of OPEC. But it would be enough to reduce the cartel to a powerless shell. OPEC might effectively break up into regional or ideological subgroups, each pursing its own market agenda. A further breakdown could see individual oil producers inside and outside OPEC pursuing strategies based only on self-interest.

 

Consumers around the world would cheer at the breakup of OPEC or even at its devolution into a powerless shell organization. Without OPEC, individual oil producers would pump as much oil as they could in the short term, and oil prices would fall.

northernsoul's picture
northernsoul
Status: Member (Offline)
Joined: Jun 16 2008
Posts: 16
The end of Oil / Peak oil

This is an excellent documentary on The end of OIl

in 6 x 10 minute clips

 

 

 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Are we watching the death of OPEC?

Great find Krogoth.....

For over twelve months, I've been saying oil would never go below $100 unless a serious recession hit us, and never below $50 unless Depression was upon us.....  and here we are!  I am gobsmacked at the speed with which this depression is coming down..  I could never have predicted THAT, but then again the current volatility is totaly totally unprecedented.  Our world is about to change big time, and no one yet knows how or which way.

But if this keeps up, I will stick my neck out and predict gas pump queues .....  The Majors have already reduced the number of oil rigs at work by a whopping 600....  we are in deep shit, no doubt about it.

OPEC?  Well Indonesia left the cartel last year when it's oil production plumetted, and many North African countries are in the same boat.  Russia's almost bankrupt.....  what a weird world. 

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Are we watching the death of OPEC?
Matrix wrote:

For over twelve months, I've been saying oil would never go below $100 unless a serious recession hit us, and never below $50 unless Depression was upon us.....  and here we are!  I am gobsmacked at the speed with which this depression is coming down..  I could never have predicted THAT, but then again the current volatility is totaly totally unprecedented.  Our world is about to change big time, and no one yet knows how or which way.

Russia's almost bankrupt.....  what a weird world. 

Been fascinating to watch, I must say. Having spent my first 60+ years in what I thought was a relatively stable world, I too have been amazed at what is currently happening. I never dreamed, when I watched the Crash Course, that the "destructive" reset Chris mentioned would come about so fast and in such bizzare ways!

Sam....

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Are we watching the death of OPEC?
Oil May Fall Below $25 Next Year, Merrill Lynch Says (Update1)
By Grant Smith

Dec. 4 (Bloomberg) -- Crude oil may dip below $25 a barrel next year
if the recession that’s slashing fuel demand around the world spreads
to China, Merrill Lynch & Co. said.

Global oil demand will contract in 2009 as economic growth slows to its weakest since 1982, Merrill Commodity Strategist Francisco Blanch
said in a report today. In October, when oil was around $100 a barrel,
the bank predicted that prices may slide to $50. Crude traded at $45.30
in New York today, the lowest since February 2005.

“A temporary drop below $25 a barrel is possible if the global
recession extends to China and significant non-OPEC cuts are required,”
Blanch said. “In the short-run, global oil demand growth will likely
take a further beating as banks continue to cut credit to consumers and
corporations.”

Crude hasn’t fallen below $25 a barrel on the New York Mercantile Exchange since November 2002.

Global oil demand has slumped as the U.S., Europe and Japan face
simultaneous recessions for the first time since World War II. The
number of Americans collecting jobless benefits rose to 4 million in
the week to Nov. 22, a 26-year high, the Labor Department reported
today. European Central Bank President Jean- Claude Trichet said the
euro region’s economy will shrink in 2009.

$50 Average

Merrill reiterated a Nov. 26 forecast that oil futures traded in New
York will average $50 a barrel next year. Prices “could find a trough”
at the end of the first quarter and undergo a “modest recovery” in the
second half as economies strengthen, according to today’s report.

“We expect strong cooperation to emerge” among members of the
Organization of Petroleum Exporting Countries as prices fall below $50,
Blanch said. OPEC, producer of more than 40 percent of the world’s
crude, was still pumping about 1 million barrels a day more than its
official target of 27.3 million barrels a day last month, according to
a Bloomberg survey.

Producers in Canada may shutter almost 800,000 barrels a day if prices decline below $35 a barrel, Blanch added.

Merrill’s $50-a-barrel assessment for 2009 is the second- lowest
among 32 analyst estimates compiled by Bloomberg, after a prediction of
$43.13 by ANZ Banking Group Ltd. issued on Nov. 18.

To contact the reporter on this story: Grant Smith in London at [email protected]

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Are we watching the death of OPEC?

Here's what one of my favorite analysts had to say about this Bloomberg article:

Since the price of oil is not reflecting the fundamentals of supply and demand at the moment,but instead sounds like a very big bubble going POP!  - HISSSSS, none of this subtle analysis below is worth the effort of reading.
 
The article is a good opportunity to keep on tipping buckets over Chavez and Ahmedinejadand their crazy plans to spend oil money on their poor.( Thank God we don't have lunatics like that in the grand old US of A. )
 
The price of oil on the rotten, collapsing New York market is going to fall no matter what OPEC does. At some point OPEC and perhaps Russia will declare : We will sell our oil in the usual way, and in any major currency,
but with us setting a minimum price - the oil industry cannot operate with its big projects and long timeframes
with the price of oil changing from US$147 to $43.67 per barrel in 5 months.
 
The system needs to be much more stable.In fact for the oil decline future we now face, if every country/locality was to stick to their Oil Depletion Protocol target, ( matching consumption to supply, rather than matching supply to growthist demand )
the price of oil could remain constant in New Dollar terms.
 
The New York price of oil won't fix itself until the price of US Dollars is sorted out,and the landscape will look a lot different after that.
 
Dave
Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Are we watching the death of OPEC?

Qatar warns of crude supply shock

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Are we watching the death of OPEC?

The crude crunch is coming

 

Jantjedeman's picture
Jantjedeman
Status: Member (Offline)
Joined: Dec 7 2008
Posts: 7
Re: Are we watching the death of OPEC?

would it be wise to stop the monopoly of the opec and make it a real market?

And yes, it would be smarter to go right away to solar power. Because everyday there is many times more energy from the sun that the whole world needs. Should have been done in the past however. But always was the arguement that the oil price was too low to invest in solar power. 

We need only to find out how to make the most yield of the solar energy.

I dont mean strictly solar energy on collectors. I mean the heating power of the sun for example. I heard of roads being heated by the sun in which water pipes are running. The sun heats the water......

The sun can also heat air, and hot air rises making it possible to move turbines. and thus there is a transformation of solar energy to mechanical energy. The oil price is very low, the commodities (metals, copper) are historically low. Now is the time to buy those commodities, buy the oil, coils whatever for so little costs. And store them in the US. Then use those materials to make those solar cells etc. before the commodity prices inevitably goes up and one cannot afford this anymore. So some smart people should really figure out the commodities which most likely be necessary be necessary to make big scale solar equipment.

The Americans should really buy as much as commodities as possible (and stocks in those commodities making companies) because those prices are cited in dollars. And dollar making is something the FED is an expert, while amazingly increasing the value of the dollar (for as long that keeps on continuing, profit from it like there is no tomorrow!).

Many ideas are there on the internet. Hopefully Obama will try out those good ideas.

for example: http://home.att.net/~cleardomesolar/forcedairheater.html

 

 

 

 

 

 

 

 

 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
SURPRISE

The cartel tells the world it's planning a surprise cut, but this could
backfire.
Once upon a time it was tricky to decipher the intentions of the Organization of
Petroleum-Exporting Countries, with its 15 members often torn between keeping
prices high and political allies happy. But with oil prices sinking to four-year
lows of $40.00 per barrel on the back of slumping global demand, OPEC president
Chakib Khelil has enticed traders back to black gold by desperately promising a
"surprise" cut in production later this month.
This "Helicopter Chakib" rescue seemed to do the trick Monday, with crude oil
futures rising to $42.50 per barrel, from $40.81, on the New York Mercantile
Exchange. European Brent crude rose just over a dollar to $40.29, during midday
trading.
But market sentiment is so depressed that it will take a very big surprise to
get traders smiling again. A cut of 1.5 million barrels has already been priced
in by analysts, given the $100 plummet in oil prices since July, so Khelil's
promise of a "surprise" will now raise the bar to at least 2.0 million barrels.
And to be a real surprise, the cut would therefore have to be a big one--well
above 2.0 million.
"You're never going to surprise if you say in advance you're going to surprise,"
said Simon Wardell, an analyst at IHS Global Insight. "You wonder whether there
will be genuine compliance with a cut of over 2.0 million barrels."
http://www.forbes.com/markets/2008/12/08/opec-oil-cut-markets-commodities-cx_ll_\
1208markets09.html

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Are we watching the death of OPEC?

According to my OPEC source, King Abdullah was sincere when he stated his desire
for US$75 per barrel at the time of the Cairo meeting. Although US$75 is
substantially higher than the present price, it is still substantially lower
than the expected US$100 per barrel average for 2008 as a whole. Hence, Saudi
Arabia may still be attempting to support the global economy and curry favour
with the Obama administration, despite not wanting crude oil prices to continue
to decline.

The real reasons for OPEC not cutting its production ceiling at the Cairo
meeting are much more mundane, according to my source. First, OPEC was concerned
it would lose credibility if it was to agree to new cuts and it later found
compliance to the 1.5 million barrels-per-day (bpd) cut announced at the Oct. 24
meeting was poor. Reuters has since estimated that OPEC-11 production was down a
solid one million bpd in November compared with the previous month.

Second, despite not wanting lower crude oil prices, Saudi Arabia was willing to
live with prices at about US$50 per barrel for a few more weeks to pressure the
cheaters within the cartel into greater compliance with previous cuts. OPEC
tends to divide into two camps. The first includes Saudi Arabia and the Gulf oil
sheikdoms, which are pro-America and can make do with relatively low oil prices
to balance their government budgets and tend to adhere to their production
ceilings. The second, including Ecuador, Iran and Venezuela, push hardest for
production cuts but are less willing to comply with them because of a strong
need for high oil revenues to help pacify their populations.

Third, OPEC did not make additional production cuts at the Cairo meeting because
it wanted to continue to assess the impact of previous ones. Based on its
forecasts for oil supply and demand, OPEC believes the world market should be in
balance in 2008 and 2009. The core reason I gave for collapsing crude oil prices
in my column two weeks ago is that OPEC is seriously underestimating the damage
done to the global economy and world oil demand by the global financial crisis
and high oil prices.

If crude oil prices are to come back up to US$75 per barrel in the next year,
OPEC must act less like a supertanker reversing direction and more like the U.S.
Federal Reserve battling the global financial meltdown
http://www.financialpost.com/trading_desk/energy/story.html?id=1047848

ckessel's picture
ckessel
Status: Martenson Brigade Member (Offline)
Joined: Nov 12 2008
Posts: 465
Re: Are we watching the death of OPEC?

Thanks Damnthematrix and Krogoth for your excellent research and threads. I'm still trying to get my wits around the crashing  oil prices. It really doesn'y add up for me that the recession/depression could reduce demand to the extent of bringing oil below $50.00/barrel.

 

krogoth's picture
krogoth
Status: Platinum Member (Offline)
Joined: Aug 18 2008
Posts: 576
OPEC explanation

Well, it basically boils down to supply and demand. If demand becomes light because Americans cant afford gas, its a forced conservation going on. OPEC is stuck between raising prices to meet OPEC country demands (they vary) by cutting back on production, possibly stimulating more conservation from people simply not able to afford to drive as much, or let it continue to go down. If they raise prices, they could usher in doom for themselves because it stimulates research to get us off of fossil fuels and forces people to drive less worldwide. If prices continue to lower, they damage what they think they need to make at ppb prices to keep individual OPEC countries where they think they need to be with internal economies.

To make it even simpler, they are greedy and want to continue to be greedy and get as much as they can out of oil. They will find a price point that makes them comfortable, and we can live with. They will test us over the next 6-12 months to see where that price point is regardless of inflation, recession, depression, hyperinflation or whatever.

So basically gas should go back up, but not to the above $140 a barrel prices we experienced in July 08. They will fall between what we have now and what we paid in July 08.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments