If Oil Prices Keep Falling, OPEC Must Act to Restore ‘Fair’ Rates
The consensus among many Arab OPEC producers is that, one way or another, the worldwide price of oil will stabilize, then rise again during 2015, settling between $70 and $80 per barrel by the end of the year, probably without intervention from the cartel’s leadership.
Reuters interviewed several OPEC representatives during the week ending December 28, some from what it called “core [Persian] Gulf” oil countries who said a return to stronger global economic growth should increase demand for oil, particularly in China and Europe.
“The general thinking is that prices can’t collapse, prices can touch $60 or a bit lower for some months then come back to an acceptable level which is $80 a barrel, but probably after eight months to a year,” one Gulf oil source told the news service.
A separate Gulf OPEC source said to Reuters: “We have to wait and see. We don’t see $100 for next year unless there is a sudden supply disruption. But average of $70 to $80 dollars for next year — yes.”
Nor do any of these delegates want a return to oil averaging $100 per barrel very soon. They say that would only turn this year’s precipitous drop in oil prices into a boom-and-bust cycle by encouraging excessive oil production by high-cost non-OPEC producers such as those in North America, who lately have been relying on hydraulic fracturing, or fracking, for their oil boom.
Instead, these Arab OPEC members see prices settling at a “fair” price around $10 or $20 per barrel above the current rate, which has been hovering around $60 per barrel. Many observers believe that shale oil extracted through fracking isn’t profitable at such a low price.
They also say this “fair” price can be reached without emergency action by OPEC. The cartel’s next meeting to discuss, and perhaps set, new production levels isn’t scheduled until June 5, 2015, and its secretary -general, Abdullah al-Badri, said there are no plans for any action before then.
Yet there is a possibility that OPEC eventually may have to intervene if the global price of oil remains stubbornly around $60 per barrel or falls further, said Iraqi Oil Minister Adel Abdul Mahdi, one OPEC representative who allowed his name to be used in an interview with Bloomberg News.
“If prices keep falling to very low levels where the whole equation is not balanced, then definitely OPEC has to step in,” Abdul Mahdi said. But he said nothing about OPEC remedying the problem through production cuts, which Iran, along with Venezuela, have been calling for in vain.
That plea has been ignored by the influential Gulf OPEC members who are rich enough to withstand a finite period of lower oil revenues and were behind the cartel’s decision on November 27 to keep production levels at 30 million barrels per day.
Influential OPEC leaders such as Saudi Oil Minister Ali al-Naimi have since argued that the reason for maintaining the production level was to recoup market share lost to high-cost or “inefficient” non-OPEC oil producers such as American frackers or Russians, making oil production unprofitable for them.
Despite Iraq’s previous outspokenness on cutting production, it now appears to have accepted OPEC’s strategy. Abdul Mahdi told Bloomberg News that the Saudi strategy eventually “made sense to all of us.” And on December 23, the Iraqi cabinet approved a budget for 2015 predicated on oil priced at $60 per barrel.
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.