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Page added on October 5, 2014
World on the brink of oil war as Opec bickers over price
A secretive group of the world’s most powerful oil ministers will soon gather in Vienna to take arguably one of the most important decisions that could affect the still fragile world economy: whether to cut production of crude to defend prices at $100 per barrel, or keep open the spigots as winter looms among the biggest energy-consuming nations?
A sudden slump in the price of crude has exposed deep divisions within the Organisation of Petroleum Exporting Countries (Opec) ahead of its final scheduled meeting of the year next month to decide on how much oil to pump.
Some members, led by Iran, have called for immediate action to stem the drop in oil prices, while the Arab sheikhdoms of the Gulf have so far argued that it could be another three months before it becomes clear whether the group should cut production for the first time since December 2008.
Whatever they decide, oil remains the lifeblood of the global economic system due to its direct impact on inflation and input prices. Brent crude – a global benchmark of oil drawn from 15 fields in the North Sea, dipped last week to multi-year lows below $92 per barrel as a perfect storm of a strong US dollar, oversupply in the system and declining demand shattered confidence in the market. Brent has tumbled 20pc in the last three months after touching $115 per barrel in June.
In the US – the world’s biggest consumer – crude for November delivery at one point last week dropped below the psychologically important $90 pricing level, raising fears that a prolonged slump could put many of America’s shale drillers out of business. Shale oil, which can cost up to $80 per barrel to produce, has spurred an energy revolution in the US, which has started to threaten the dominance of producers in the Middle East.
However, at current price levels many of these new so called “tight oil” wells are approaching the point when they will soon become unprofitable.
Like the situation in the US, falling oil prices are also a double-edged sword for Britain’s economy and investors. Although George Osborne, the Chancellor, is less reliant on tax revenues from the North Sea than some of his predecessors, prices are approaching the point when many of the developments planned offshore west of Shetland by international oil companies could be placed on ice.
A sharp drop-off in domestic oil production and associated tax receipts from the North Sea would give Mr Osborne an unwelcome hole to fill in the government’s public finances heading into next year’s general election. However, falling oil prices will help to keep inflation low.
For Britain’s motorists the current declines have been good news that has trickled through to the price of petrol on forecourts. A litre of unleaded petrol in the UK has fallen a few pence over the past month to an average of around 127.21p on average, a figure last seen in 2011, just before Mr Osborne raised the value added tax on fuel to 20pc, from 17.5pc.
All eyes are now firmly focused on the next move by Opec, which controls 60pc of the world’s oil reserves and about a third of daily physical supply. The group has been branded an unaccountable “cartel” by free-market critics in North America who claim its system of limiting production by setting an output ceiling and quotas is tantamount to price rigging.
Although this is an accusation that the group’s secretariat which is based in Vienna strongly denies, its mostly unelected group of policymaking oil ministers undeniably pull the strings of the global energy industry in the same way that central bankers can control currencies.
Opec states have largely managed to maintain cohesion over the last decade as prices over $100 per barrel have enriched their economies and encouraged adherence to quotas. This consensus is now starting to break down, creating more uncertainty in the market and a potentially destabilising situation for the global economy.
Next month’s meeting promises to be the most tense held since the onset of the Arab Spring in 2010, with the Shi’ite Muslim faction of Iran and Iraq already appearing to line up against Saudi Arabia and the United Arab Emirates (UAE).
Iran’s Oil Minister Bijan Zanganeh has placed his cards on the table early by calling for Opec to urgently cut output to stem the sharp recent decline in prices, which threatens the Islamic Republic’s fragile economy after years of restrictive sanctions.
According to research from Deutsche Bank, Iran has the highest fiscal break-even price for its budget at over $130 per barrel of Brent, compared with the UAE at around $70 per barrel and Saudi Arabia at about $90.
However, the Gulf’s Arab states are all sitting on huge cash piles that are held overseas through sovereign wealth funds and foreign currency assets that can be drawn upon to help them weather any short-term drop in oil export revenues.
Iran, possibly supported by Iraq, will push hard for a change in Opec’s production targets at the meeting and a cut to its overall output by 500,000 barrels per day (bpd) from the 30m bpd limit that it currently sets for members. The latest figures suggest that level has already been breached with Opec members perhaps pumping as much as 1m bpd above the group’s agreed quota.
“Considering the downward trend in prices, Opec members should try to temper production to avoid further price instability,” Mr Zanganeh was quoted saying by Iranian state media at the end of last month, even before crude fell to its current lows.
Mr Zanganeh is at odds with his most powerful rival in Opec, Saudi Arabia’s influential oil minister, Ali Naimi, who has so far dismissed calls for an emergency meeting to be held ahead of November. Nevertheless, the kingdom has taken the precaution of trimming its own output and reducing the price of crude it offers to customers in Asia in an apparent move to defend its market share.
According to Opec figures, Saudi Arabia cut its output over the summer by more than 400,000 bpd to 9.6m bpd. Although the kingdom’s dominant role in global oil markets is increasingly being challenged by the rise of US shale, Saudi retains its place as the swing producer due to the almost 3m bpd of physical capacity it currently holds in reserve.
Demand for crude normally spikes during the northern hemisphere’s winter season and some Opec officials have argued that the group should wait to see if there is a repeat of the “polar vortex” conditions that shut down the eastern seaboard of the US and led to a brief contraction in the country’s economy in the first quarter.
“Winter is coming,” a senior Opec delegate from the Arab side of the Gulf recently pointed out to The Sunday Telegraph when asked about the meeting. “This softness in the market is not long enough to be called a correction so let’s wait until we’re sure it is a correction before taking any action.”
“Within Opec we are not concerned about the price; what concerns us is that the market is well supplied,” he said.
Saudi enjoys some of the lowest production costs, excluding capital expenditure on new projects, in the region of $2 per barrel, giving it a large margin to soak up a sudden drop-off in price. This compares with estimated production costs in the North Sea which are in the region of $50 per barrel, according to Oil & Gas UK figures. This leaves drillers offshore in Britain more susceptible to price fluctuations.
To further complicate the forthcoming meeting, Arab Gulf states remain deeply suspicious of Iran as the leadership in Tehran edges towards a settlement with Western powers over its nuclear programme. An end to Tehran’s economic isolation could trigger the opening up of its oil industry to foreign investment, a move that would bring more crude onto an already flooded market.
Iran is currently producing around 3m bpd of crude but it is thought with access to Western technology this figure could be easily doubled. Combined with Iraq, which aims to eventually increase production capacity to as much as 9m bpd by the end of the decade, both countries could challenge the current dominant position of Saudi Arabia and the Arab Gulf states within Opec.
The looming issue of global over-capacity has been further complicated by the sudden return to the market of light, sweet Libyan crude. Exports from Es Sider have returned to levels of around 800,000 bpd over the last month, adding to the pressure on Brent. In the background is the surge in US shale oil production and the mounting pressure on President Barack Obama to lift the US crude export ban that has been in place since the 1970s to guarantee America’s energy security.
Fracking has helped the US achieve its highest oil production levels since 1986 over the last two months at a rate of 8.5m bpd. The threat of a full lifting of the ban on exports has also helped the US to drive down the price and potentially cripple the Russian economy. Moscow is largely dependent on crude sales for foreign currency earnings and oil trading at around $80 per barrel for a period of months could bring the country to its knees.
Indeed, losing market share to shale drillers in the US and the potential growth of unconventional oil and gas in other regions is a risk that traditional Opec producers are increasingly having to confront. Recent data from the US Department of Energy has revealed that Nigeria, also a member of Opec, has dropped out of the list of countries supplying America with oil.
According to Deutsche Bank analysis “tight oil” in North America would be unlikely to attract investment at a cost of $90 per barrel, close to its current levels. Certain members of Opec are also keen to see countries like the US take more responsibility for maintaining price stability instead of solely focusing on increasing production.
The German investment bank estimates that if Opec fails to cut production in response to the current trend in falling oil prices then around 9pc of US “tight oil” output would be immediately rendered uneconomic at a level of $90 per barrel. This figure would rise to 39pc should prices slump as low as $80 per barrel.
However, some officials within the group already believe that the US should itself shoulder some of the burden.
“The culture of blaming Opec needs to change,” said the Opec delegate. “The responsibility for the market has to be shared.”
On the demand side, a number of leading energy think tanks have recently revised their estimates for demand based on the unexpected slowdown of the Chinese economy in the second half of the year. These worries escalated in August with the latest data showing a slowdown in industrial production in the world’s second-largest economy.
China has picked up much of the slack as the US has moved over the last five years to reduce its dependence on Middle East oil and a longer term slowdown could trigger Opec nations to slash output aggressively to defend prices.
Beijing is now viewed by many Gulf oil producers as a more important energy trading partner than the US, which has been the traditional focus since the end of the Second World War.
The International Energy Agency – the world’s top oil watchdog – revised down in September its forecast for demand for both 2014 and 2015 in response to China’s sudden slowing. The Paris-based group cut 900,000 bpd from demand growth this year and 1.2m bpd from its forecast in 2015, when it expects the total global draw on oil to be in the region of 93.8m bpd.
To complicate the decision that Opec oil ministers face in November, the region is now confronted by the sinister rise of the Islamic State jihadists in northern Iraq and a bitter row between some of its Arab Gulf members over the support of extremists. In Iraq and Syria, the group known as Isil, is itself thought to be profiting from the sale of oil to the tune of $2m a day.
Given that Gulf states have pulled in the major powers led by the US and the UK into taking military action against Isil they may feel obliged to keep pumping at current rates, at least while Western forces carry out strikes and destroy the biggest single threat to their own borders.
“Nothing has changed on the international stage since our last meeting,” said the Opec delegate, adding. “Arguably, it has just got worse.”
60 Comments on "World on the brink of oil war as Opec bickers over price"
JuanP on Mon, 6th Oct 2014 10:38 am
Davy “Juan, I hate the word patriotic.”
I meant no offense. Patriotism is not a bad thing per se, in my mind. It does, however, get used and abused by people trying to manipulate others.
Most of us need to feel that we belong with others, and I see patriotism as an extension of that. I have always mostly lacked that feeling of belonging with others and miss the warmth and peace it provides. Losing your patriotism is an emotional loss, but it is also mind opening. There is a point on that curve where patriotism hit its sweet spot, and I lost that.
Northwest Resident on Mon, 6th Oct 2014 11:30 am
From here on out, everything that goes wrong somewhere in the world will result in rampant speculation as to whether or not USA operatives are instigating it. Accusations will fly, more so than ever, and chances are they’ll probably be right fifty percent of the time. Maybe more.
I admit to having some patriotic inclinations, but I am most definitely not a “flag waving” patriot. My patriotic loyalty is NOT to the elites who manipulate and control the US Government, but to the IDEALS and lofty intents expressed in the U.S. Constitution and in the Bill of Rights. There was a DREAM once that launched America on a path to greatness and put America on a shining pedestal for the entire world to admire and exemplify. But the sociopaths, the greedy, the self-serving and the criminal syndicates slowly but surely took control of and perverted that great dream while large portions of the American population grew bloated and obese from all the riches of this great land. Now America is under the control of those darker forces. They are running the show. There are still great people and great ideals alive in America, and I believe those will endure, but not without a fight, not without pain and suffering and blood and death. That’s the way it has always been, good versus evil, and that reality is likely to reintroduce itself to us all in the near-term future.
GregT on Mon, 6th Oct 2014 12:01 pm
“We hold these truths to be self-evident, that all men are created equal; that they are endowed by their Creator with inherent and inalienable Rights; that among these, are Life, Liberty, and the pursuit of Happiness; that to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed; that whenever any Form of Government becomes destructive of these ends, it is the Right of the people to alter or abolish it, and to institute new Government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”
“The greater the state, the more wrong and cruel its patriotism, and the greater is the sum of suffering upon which its power is founded.”
Leo Tolstoy
“Real patriotism is a willingness to challenge the government when it’s wrong.”
Ron Paul
Davy on Mon, 6th Oct 2014 12:09 pm
Juan/Greg, I do not research much the activities of the US organizations you mentioned. Yet, I am well aware they are well funded, backed, and effective. These organizations have spread across the globe because the US reach is great with the US State Department and US military. I approach this situation more with NR’s point of view. What we are seeing today is excessive accusations of US culpability. I am also seeing damn if you do damned if you don’t situations in Egypt, Syria, and Libya. If the US gets involved we are bad if we don’t we are bad. I am not a globalist. I am not for a US hegemony. I personally see the hegemony as a spent force that will deflate in a few short years. I want to see the US downsize and withdrawal towards its borders. In today’s global world cutting and running is not an option. The world is tightly woven and interconnected. I personally think the BAU arrangement is fixed except around the edges. A new order will rearrange when BAU collapses. This situation is the same as is true in ecosystem failures. This talk of the rise of China and the Brics is just talk. The Brics have risen and will rise more but never to the level the propagandist here claim. We have a world order that is just not going to change much. The world is increasingly multipolar. A multipolar world sounds great but it is increasing looking like a free-for-all in a dangerous end game. The whole Russia/China partnership will be problematic and it is only a short time away from conflicts of interest. The whole American dominated post-Soviet period is unraveling and with it globalism. We can’t de-manage globalism. It will collapse when core changes are made. Major financial and economic changes will have unintended consequences and spread contagions. I respect you and Greg and I appreciate your educating me on the bad side of the US policy. I don’t disagree I am just temper both of your enthusiasm. It is a big world and the others are up to no good but the focus is always the US as the villain. This PO board is basically an anti-American blog. There are good and bad reasons for that. There are constructive people here and there are those spreading their propaganda for ideologue purposes. Yoda Mak is a perfect example. I am not patriotic but I will defend fairness. In doing so I may appear patriotic. I find when I am called patriotic it is usually from the anti-Americans who believe in all or nothing. The anti-Americans blame the US then praise their bright horse. They are as bad as their foe. I am all for criticism but I am going to squawk at imbalances and unfairness.
GregT on Mon, 6th Oct 2014 1:34 pm
davy,
I am not anti American. I live 3 miles from the US border, and I spend a great deal of my time stateside. My family even owns property in Birch Bay, that we stay at pretty much monthly. I LOVE the USA. If I had the option, I would move south in a heartbeat.
What I don’t love, is the destruction being ravaged around the globe, by a corrupt globalist elite. People all around the world only want to live their lives in peace. They want the rights to their own self determination. They don’t want to see their friends, relatives, and loved ones being bombed back into the stone age, just because their elite don’t get along with the US elite. Millions of people have been brutally slaughtered around the globe, all in the supposed names of liberty, justice, freedom, and democracy. Whether the majority of the people in those countries agreed with those principles, or not.
I understand that as Americans, your indoctrination has been different than ours in Canada. My indoctrination, rightly or wrongly, has been to promote peace. As a Canadian, it is difficult to understand the militarism in the US. While I do understand that we are offered a degree of ‘protection’ by the US, I have always wondered, protection from what? In my lifetime, I have only seen one country continuously waging wars around the globe.
The globalist agenda being propagated by TPTB in DC, is not in the best interests of Americans, it is not in the best interests of Canadians, and it is not in the best interests of the citizens of the world. It is only in the best interests of the globalists themselves, and they are using the US MIC to further their interests, while spilling the blood of innocent people not only in other countries, but the blood of the sons and daughters of Americans as well.
There is only one way for this cycle to end, and that is by the will of the American people themselves. As Jesse Ventura recently said, vote for anyone in the next election, other than democrats or republicans. The political system in the US has been hijacked by special interests, and if the cycle is not ended, things are only going to get much worse. I think we all know who the next POTUS to be installed will be. God help the world, if she gets to be the next President of the United States of America.
Apneaman on Tue, 7th Oct 2014 5:56 pm
GregT
When you add inherent tribalism to a life time of ever increasing propaganda even the slightest criticism of the country’s misdeed’s gets taken as a personal insult by many. I too am a Canadian and I was married to a southern belle and lived in the great state of Georgia and I liked it. My ex is a bleeding heart liberal democrat (but a good woman nonetheless) yet even she still had that touch of exceptionalisim in her attitude and her father would go on lengthy, clumsy, rationalizing rants every time I brought up a nasty piece of U.S. history. It often ended with him calling me a socialists and telling me to go home. Nowadays when they get frustrated they call you a terrorist and of course the old standby anti-American; it’s a timeless classic. I should probably be kinder, since we have are own failings that will effect the whole planet now (tar sands) and they are really suffering down there. I figure if/when the economy crashes we will close that gap in quality of life between us and them in a real hurry. Canadians are the most unprepared people on the planet.
I don’t consider myself anti-American, anti: exceptionalisim/aggression/war(except in defense)/excessive greed etc. Besides there is just so much material there how could one refuse?
Davy on Tue, 7th Oct 2014 6:26 pm
Greg, I appreciate your positions. I have learned a great deal from you I didn’t know. You are the type of American critical I listen to. Yoda Mak is the type I despise. You are fair and balanced. Yoda is mean and unfair. Apnea, still trying to figure you out but you seem decent. I am not patriotic. I am a concernd citizen. I will defend balance and fairness when it comes to my people.
Apneaman on Tue, 7th Oct 2014 10:59 pm
Thanks Davy
I’m still trying to figure me out too.
GregT on Wed, 8th Oct 2014 12:14 am
Thanks Davy,
I have no affiliations, and I have no agenda, I only seek the truth. Borders are imaginary lines drawn in the sand, that only human beings are forced to adhere to. Political ideologies usually begin with good intentions, but like so many other things human, over time they become corrupt. It is in our nature. Every so often, the slate needs to be wiped clean, or the corruption becomes systemic. That is what I see occurring now, and IMHO, it is only going to get worse going forward. I have no problem with self defence, and I will be the first to put my life on the line if necessary, but pre-emptive war and killing, I have a very serious problem with.
Davy on Wed, 8th Oct 2014 6:16 am
Greg, I especially appreciate your insight into Russia and the Ukraine. I already understood the basic dynamics there. The basic dynamics that are far beyond MSM discussions. The extent of the US and EU mischief in the Ukraine was less apparent. It takes research to expose these dangerous policies and you have done that research. I may seem anti-Russian but actually I have an admiration for Russia. My negativity towards Russia is primarily a response to balance and fairness in the American critique that is so often the case on PO. Russia is no angel now or historically. Your American critique is good because I know you do not hate the people you hate the corruption of the system. You also hate the globalist agenda as I do. You are right to fear them because we are not yet at the point where globalist cannot damage the world. Descent will end their grip but we are not at that point yet. Much suffering can happen from their agenda especially in the end days of BAU. You rightly point out that danger of the globalist hidden agenda.