Do Falling Oil Prices Mean the End of OPEC?

Source: Justin Sullivan/Getty Images

Justin Sullivan/Getty Images

 

The Organization of the Petroleum Exporting Countries (OPEC) is projecting a loss demand for its oil by 100,000 barrels a day for 2015, but its leaders stand by their output plans from lower-cost oil producers.

OPEC, which is made up of 12 countries with Saudi Arabia as the leading producer, is also projecting slower oil-production growth in the United States. The group’s January 2015 report said that demand for OPEC’s crude would average less than 28 million barrels a day in the first half of this year.

According to OPEC’s report, the drop in prices, starting around June, has affected production in the United States, mainly shale oil industry, and consequently prices. The report says that lower prices and reduced drilling are leading to a projected decrease in U.S. oil production growth — down to about 950,000 barrels a day in 2015 in comparison to last year’s increase of about 1.6 million barrels a day. 

What does this mean for the oil industry?

OPEC’s announcement and the past year of decreasing prices have cause havoc in the oil industry. According to the New York Times, BP is cutting about 200 employees and 100 contractors from its North Sea staff, and Royal Dutch Shell is canceling a $6.5 billion petrochemical project in Qatar.

Seth Kleinman, an analyst at Citigroup in London, told the New York Times that prices lower around $50 a barrel won’t work in the industry and will cause massive layoffs. “People know these prices are unsustainable,” he said.

According to the OPEC report, they’re only set to continue declining, though. As a result, oil prices, which are now at their lowest in nearly six years, will keep declining in 2015 as “bearish sentiment in the oil market persists as it faces an increasing overhang of at least 1 [million barrels per day],” the OPEC report said.

Is OPEC dead?

The market strain is coming from who’s producing the oil. When United Arab Emirates’ oil minister said OPEC wouldn’t budge on this year’s output, it put the nail in the coffin for the group, according to George L. Perry of the Brookings Institute. “The Saudis have made it clear, by what they have said and what they have not done, that they want the U.S. and others to cut production before they do any cutting of their own,” Perry wrote. “This is the end of the Organization of the Petroleum Exporting Countries as we have known it, and it will keep the global oil market chaotic for some time.”

The New York Times notes that Saudi oil minister Ali al-Naimi and other OPEC leaders suggest cuts in production should come from shale oil companies in the United States, which have a higher production costAccording to Naimi, OPEC members’ production costs are lower, citing that Saudi Arabia’s output costs were less than $10 a barrel. But that isn’t a long-term solution, according to Perry. He writes that “to discourage enough high-cost production for the longer run will require prices to stay substantially below the $100 level that prevailed through last summer,” and such prices will continue to demolish the oil industry as it is.

In response, lower oil production will have to make adjustments as fuel efficiency is unlikely to change rapidly, Perry says, putting the burden on the “supply side of the market, where low prices could force some high cost fields to shut down earlier than planned and cause many new drilling projects to be abandoned.”

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