14:54 GMT +322 September 2019
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    OPEC: Fueling Discord

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    The Organization of Petroleum Exporting Countries failed to agree on oil production cuts challenged by declining prices of crude, which has lost 30 percent since June. While Russia may be one of the parties affected by cartel inaction, lack of a decision jeopardizes the role of the OPEC as an instrument to ease oil price volatility.

    Studio guest Andrei Fyodorov, former deputy foreign minister of Russia and the director of the Center for Political Research Foundation in Moscow, Vladimir Mikheev, an independent analyst, and Nathalie Janson, a French economist and Professor at the NEOMA Business School, shared their opinions with Radio Sputnik.

    The OPEC’s decision in Vienna was not to make any deep cuts in oil production and keep the output unchanged. What is behind this decision?

    Andrei Fyodorov: OPEC is only 12 countries. Russia is not in OPEC, the US is not in OPEC. And many people forget that even before the Vienna meeting, it was agreed within the OPEC that even if there would be cuts, it will not touch the two serious countries – Libya and Iraq. So, in fact, it is the situation where there was an understanding that there will be no cuts, because, if you introduce cuts, you need to cut it 1 million barrel per day, which is impossible. It will kill, first of all, the economy of Iraq, Libya, which are very important for the US, and also for Saudi Arabia, because they don’t want the destabilization there, plus Iran.

    The latest decision of OPEC not to decrease its output, what effects it can have on the global economy?

    Nathalie Janson: For France it is good news, since we depend on oil. For us to have cheaper oil at the time of the weak Euro, it is pretty much of a good news and for many other European countries it is the same thing. Some people may also think that it is not such a good news, because it may also accentuate the deflation that is currently at work at the European level. But at least cannot worry about having to face an expensive oil on the international market.

    Regarding the US, this is true that one of the reasons, that has been put forward for that decision to maintain the same production level, is the fact that especially Saudi Arabia wants to keep the market share, which is the key variable for the future given that now the US is getting more and more independent thanks to the new oil they discover through the fracking technology. And the idea is that a marginal cost that is close to $65 and keeping the price at that level, in the long run for the US it may be a problem to continue to develop that kind of alternative source of oil.

    What is your prediction? If the oil prices drop even further from now, to say $65 per barrel, what kind of effect will that have globally?

    Nathalie Janson: Globally, for all the countries that depend on oil, it is rather a good news. For the US it may be a sign that maybe some of their investment in the shale oil may not have the return expected. But the investment is not that expensive, so we will see how they will behave in terms of a new increased investment in that activity.

    Regarding Saudi Arabia, I think that they are concerned since a couple of years about the fact that in many countries we are trying to look for alternative sources of energy and we are concerned about preserving the environment. So, it is also a way for this country to send a signal that they are ware that if the price stays on the high level, it is also an incentive for the countries that depend on oil to develop the technology to use less oil in order to produce plastic or whatever other goods, and also to develop alternative energies. Everything is based on the fact that we depend on oil. And if the price of oil gets higher, it means more incentive to develop alternative sources of energy.

    In terms of the meeting in Vienna, who do you think were the winners and who were the losers of this meeting?

    Vladimir Mikheev: I think that definitely the winner was the one who’d actually initiated the whole process, the one who is the kingmaker within the OPEC cartel, and that is Saudi Arabia. It is another story why they did it. There are some objective reasons that the decision was not to cut production and to preserve the same quota. But also there is a conspiracy element in all of this, which is still rather intriguing. But the real winner will definitely be Saudi Arabia. And those countries, like, for instance, Bahrain or Qatar and Kuwait who can afford to have the average oil price around $60 per barrel, because that’s when they break even with their budgets.

    What about the losers?

    Vladimir Mikheev: Definitely those who actually have fixed their budgets around $100-120 per barrel. That encompasses quite a number of countries, from Bahrain that I've mentioned before, to Russia, to Iran which actually need to have the average price around $75-80. Saudi Arabia also used to claim that they would be quite happy to have the barrel of oil priced around $100. But anyway, they did start this whole price-spiraling-down process in November when they cut the price on their East Asia contracts.

    I think that among the losers also might be (this is one of the parts of the conspiracy theory) the marginal shale oil production companies in the US. and probably it could have been one of the arguments used by Saudi Arabia to convince other OPEC member states not to cut the production, saying that – let’s hit at the American shale oil companies so that there won’t be anymore the oil glut which actually exists now.

    To what extent do you think this decision could have been triggered by the big politics?

    Vladimir Mikheev: As I said, this is part of the conspiracy theory, because I actually do not fully accept the argument that this is the aim – to cleanse the American market of the marginal shale oil producers, because this has become a very flexible segment of the industry and they can actually resurrect and come back to the market quite quickly. So, the moment the price of oil rebounds, the American shale producers who are not on the margins, at the lower end of the market, they will come back.

    So, I certainly believe that there might be more sense in claiming that what we see is sort of a replay of the 1980’es, when the US actually conspired with Saudi Arabia to lower the oil prices, to make the Soviet Union bankrupt. Definitely, it is remarkable that most of the foreign media that has been reporting on the OPEC summit’s decision has actually included one additional piece, news item, saying how the Russian Ruble reacted to it. And that actually might be one hint that the conspiracy theory is quite correct, saying that it is actually aimed at putting the additional pressure within the war of sanctions against Russia.

    What do you think about this?

    Nathalie Janson: I would agree with the last piece saying that it is a way to put more pressure on Russia.

    And what about the role of OPEC in general? Many analysts question the organization’s actual point of being.

    Nathalie Janson: Yes, that’s true that you may wonder how that organization survived over time, because from an economic point of view a cartel is a very unstable organization. It is very difficult to make sure that you have a common agreement, because the big problem with having a cartel is that you’d have a free rider – the one that would not observe the agreement. But the fact that this time you have different views within the OPEC, maybe it is a sign that in the coming years it will be disintegrated.

    Related:

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    Tags:
    oil prices, OPEC, United States, Russia, Saudi Arabia
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