Executive Secretary, India Water Foundation
The forthcoming meeting of the Organisation of Petroleum Exporting Countries (OPEC) at Vienna on 4 December this year is expected to deliberate on the declining oil prices in the international market. However, many analysts feel that it’ll take more than $US40 crude to make OPEC change its mind. Recent years have seen a 44 per cent plunge in crude which has slashed OPEC members’ revenues by almost half a trillion dollars. At the Vienna meeting, the OPEC is expected to press on its strategy to batter rival producers.
According to some experts, Saudi Arabia, OPEC’s biggest member, appears determined to see through its plan to eliminate a supply glut by squeezing out competitors like US shale drillers, even as the resulting price collapse spurs dissent from Venezuela, Algeria and Iran. Media reports citing the International Energy Agency (IEA) show that Saudi Arabia’s tactic is ‘having the intended effect’ as non-OPEC supply heads for its steepest retreat since the fall of the erstwhile Soviet Union.
One analyst has opined that there’s no reason to expect any change of heart at the ensuing OPEC meeting because, “The strategy is working out, it’s just not solving the problem overnight. The market is rebalancing, and there’s pressure on shale oil production, but it will take time.”
Media reports indicate that Venezuela, which is currently facing a 10 per cent economic contraction, perhaps the steepest in the world, has frequently called for a summit between OPEC and other producers to end the crisis. Venezuelan Oil Minister Eulogio Del Pino is reported to have said recently that oil prices may drop to as low as the mid-$US20s a barrel unless OPEC takes action to stabilise the market and he wants the OPEC to adopt an ‘equilibrium price’ of $US88 that would cover the cost of new investment in production capacity. However, the Venezuelan initiative has failed to garner support from Gulf oil producers, despite the fact that languishing prices below level have upset the budgets of most OPEC members.
Undoubtedly, Saudi Arabia has been impacted by falling crude prices and has been forced to fall back upon its currency reserves and tap bond markets to plug a 20 per cent budget deficit; nevertheless, it still possesses enough financial firepower to see the strategy through. According to one expert, “Saudi Arabia is the chief architect of OPEC’s new policy, and despite calls by other members to reconsider, we expect them to remain steadfast. Their experiment in letting prices bring adjustments to the world’s oil balance has yet to run its course.”
Prospects of Indonesia rejoining the OPEC after a seven-year hiatus can spur the OPEC to increase its out target to 31 million barrels a day, from the current 30 million, but many experts differ on this. The Vienna meet can also deliberate on Iran’s ambitious programme of reviving oil exports once sanctions are removed following a nuclear accord earlier this year. According to one report, Iran has suggested at the OPEC’s June 2015 meeting that member countries should reduce their output to make way for Iran’s return. One analyst has opined that Iran’s return may not come up for discussion at the ensuing OPEC meeting because Iran’s nuclear agreement is incomplete yet.
The IEA data show that oil inventories in developed nations have reached a record of almost 3 billion barrels due to increasing supplies from both Organization of Petroleum Export Countries (OPEC) and non-OPEC producers. This signals welcome news for oil and gas consumers in Asia for an extended period.
Media reports make it discernible that increasing U.S. crude oil stocks point to further weakening in prices and a research report has predicted a trough in the first quarter of 2016 and a potential drop below $40 a barrel. It is further reported that the U.S. shale producers have successfully slashed costs to around $22 a barrel, with increasing productivity from new wells helping them to weather falling prices.
One analyst has pointed out that the current downturn is at 400 days and counting, well over double the previous downturn in December 2008 which was about 150 days. He further adds: “But pricing hasn’t turned around yet, and all the signs suggest that we won’t see a reversal anytime soon. The volume overhang of 1 million barrels per day of oil production hasn’t gone away, producers are pumping furiously, and there’s a vast inventory of oil in storage that will be released to the market at the first signs of recovery.”
One expert has opined that the OPEC could find itself sitting on a huge stranded petroleum asset before its members successfully engineer the shift of their economies off petroleum. Downturn in crude prices has resulted in an impairment of $14 trillion, just for Saudi Arabia alone. Broad estimates show that the price collapse had transferred $1.6 trillion a year from oil producing nations to governments and consumers in oil consuming countries.
In its recently released report, the IEA has predicted that global oil demand growth would slow to 1.2 million barrels per day in 2016 after reaching a five-year high of 1.8 million barrels in 2015. Media reports show that the casualties of extended low prices in the oil and gas industry include Canadian oil sands projects, North American shale and offshore oil, such as in the North Sea, along with the previous “megaprojects.”
In the Asia context some experts point out that cheaper crude prices entail the potential of affecting China, followed by India, Indonesia and Malaysia, along with Australia’s emerging LNG industry. Overall though, the region is a net winner, with India and Indonesia seizing the opportunity to slash fuel subsidies while China, India and Japan have posted economic gains due to their positions as the world’s three largest oil importers.
The IEA report has predicted that oil prices will reach $80 a barrel by 2020, in line with improved demand and declining output growth. However, it has not ruled out oil prices remaining around $50 a barrel through to the end of the decade, based on lower near-term growth in the global economy, a ‘more stable’ Middle East and continued focus by OPEC on defending market share.
The IEA in its World Energy Outlook 2015 report says that the economic benefits for consumers could be counterbalanced by ‘increasing reliance on the Middle East for imported crude oil and the risk of a sharp rebound in price if investment dries up.’ The report also points out that among factors that could trigger a sudden rebound in prices, inter alia, include: a major war in the Middle East or East Asia, a surge in demand from China or a tsunami in Southeast Asia that damages refinery installations. However, consumers can expect cheap oil and gas prices to continue for some time to come, giving countries like India a much-needed fillip to embark on the trajectory of growth.
