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Stop Blaming OPEC For Low Prices
Submitted by Nick Cunningham via OilPrice.com,
We are a little more than a month away from OPEC’s next meeting, which will be held in Vienna on December 4, 2015.
OPEC altered the course of the oil markets last year when it decided to cast aside its traditional role of maintaining balance through production cuts. Instead it pursued a strategy of fighting for market share, contributing to an immediate rout in oil prices. WTI and Brent then went on to dive below $50 in the weeks following OPEC’s decision.
OPEC is widely expected to continue its current strategy at its next meeting, and as such, no rebound in oil prices is expected, at least not because of the results of the group’s meeting in Vienna.
But that raises a question about what the world of oil expects from OPEC: Why is it that the responsibility for balancing the market falls on OPEC? Why should OPEC be the one to fix the imbalances in the global crude oil trade?
On the one hand, it makes a certain degree of sense that market watchers anticipated adjustment from OPEC. After all, the group has historically coordinated its production levels in an effort to control prices, or at least influence them. They could cut their collective production target to boost prices, and vice versa.
However, there is an element of imperialism and superiority in the expectation that the burden should fall on OPEC, which is largely made up of producers from the Middle East. It is a bizarre mentality to think that private companies deserve to seize as much market share as they can manage, after which OPEC producers can take what is left. Steven Kopits, President of Princeton Energy Advisors, laid out the concept very nicely in a Platts article earlier this year, in which he says the expression “call on OPEC” should be scrapped.
Kopits offers an interesting thought experiment. If the industry in question were, say, automobiles rather than oil, there is no question that such an arrangement would not be framed in the same manner. Imagine that the world thought it reasonable that GM or Ford could take as much market share as possible, and Toyota was expected to slash production if there weren’t enough customers left over. It is an absurd scenario, but not so different from the world of oil.
Why is it that we expect OPEC (and since Saudi Arabia is the only producer with the substantial ability to ratchet up and down production, we really are talking about Saudi Arabia) to cut output in order to help out American oil producers? Saudi Arabia and its fellow OPEC producers have their own interests, and if they believe producing at a certain level is prudent, it is a bit curious to argue that they are “declaring war on U.S. shale.” But that is exactly what happened last year when they decided to leave their production levels unchanged.
Moreover, while cutting production would help to increase prices, OPEC would lose out from selling less oil. It is not clear why OPEC should, in effect, subsidize higher cost production from around the world. Saudi Arabia tried to cut production in the 1980s to rescue prices from rock bottom levels, but it only led to the loss of market share. It is no wonder that the oil kingdom is not keen to go that route again.
Even leaving all of this aside, it is hard to even discern that such a “war” is actually taking place. After all, OPEC has only slightly increased output from 2014, and much of it came from Iraq, which has been trying to increase production at all costs, regardless of OPEC decisions. Iraq is not subject to the quota restrictions, and so it is pulling out all the stops to increase output.
The U.S. on the other hand, has aggressively increased output. It is easy to see that much of the responsibility for the crash in oil prices stems from a massive spending spree in the U.S. shale patch, which increased output by around 4 million barrels per day between 2011 and the peak in 2015, nearly doubling production from 5.6 million barrels per day (mb/d) to 9.6 mb/d. OPEC’s production, meanwhile, hasn’t changed dramatically over the same time period.
(Click Image To Enlarge)
In this light, why is it that OPEC’s decision to leave its quota unchanged in November 2014 elicited calls that the cartel was waging war? Why is the world not calling on U.S. shale producers – which have a much higher breakeven price – to get out of the business so that other oil producers around the world can survive? In any other sector, high-cost producers are forced out of the market. Nobody expects the stronger producers to cede ground to weaker ones.
U.S. production is now down by about 500,000 barrels per day since April. Oil prices will rise over the next year or so as U.S. shale is forced to cut back. That adjustment – high-cost suppliers forced out – is how markets are supposed to work.
Nevertheless, as OPEC heads to Vienna in six weeks’ time, there will undoubtedly be more headlines about OPEC continuing its war on shale.
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The Saudi's took advantage of the stupidity of the USSA state department, who wanted to 'hurt' and 'isolate' Russia, to hammer the US Shale Oil and Gas industry. Just watch as Trillions in Shale Bonds vaporize, while the Russians laugh. Sure, Russia was badly effected, but they will ride this out, and come out stronger.
I'm sure it seemed like a good idea at the time. Drop the price of oil to fuck the Russian economy so it can be looted by the Zionists.
Reality creeps in. Free money and free(ish) oil and the economy is still tanking. Raising the cost of either will surely tip it over the edge. Ooops. We appear to have broken the world economy.
What's the problem? I don't hear anyone complaining about cheap gasoline prices except those making a living off of it. The rest of us have already seen our wages and hours sink.
The really big problem is the utterly unbelievable proposition that anything the Saudis did market-wise more than halved the price of oil. I realize we are all supposed to believe this (and the author seemingly does), but the far more logical conclusion is those who set the oil price decided to cut it in half for various political reasons. This presupposes that there is no oil market per se. Actual market forces may move the price $10 dollars up or down depending on this month's inventory build or whatever other small change has occurred on a global scale, but not by half with no major change in production or demand. No small incremental change in supply or demand would account for the massive change in prices that has occurred over the last 12 months. The bottom line is that what we pay for oil is what TPTB decide we will pay, give or take a few dollars. The fact that we all put up with this and don't even question it is the real problem.
the consolation prize for chumps like us is that goldman sachs will run out of other people's oil sooner rather than later, as they accelerate the price down to a big fat $0.
Actually, I think the loss of QE money killed the oil price, as the $ were being thrown at not just stawks and bonds but oil futures. Price is just reverting back to pre-QE levels. there was never any real change in supply or demand that could have caused such a steep increase as we saw.
"Stop Blaming OPEC"
OPEC = Blatant, Open "Collusion" = Anti-"Free Market" Competition
It should be renamed to OLIGARCH...
"Organization of Lazy Inbred Gnomes Against Reasonable Competitive Harmony"
I really would like to go out and buy a five litre V8 and do my part for increasing demand for oil, but ... naaaaah, can't quite afford it yet. Besides, the price at the bowser isn't looking any cheaper.
Did the USSA always make such shit for brains decisions? I mean, with such routine regularity? Or is it "well on it's face it looks stupid, but if you look deeper, gosh, Barry is actually a genius, because..."
Like everything is on auto-pilot and no one can think more than one step ahead.
A good news from Lebanon:
Saudi prince arrested on private plane with 2 tons of drugs - reports (pills of captagon, an amphetamine allegedly widely used among fighters in the Middle East)https://www.rt.com/news/319727-saudi-prince-drug-arrest/
One down, 99 to go. its a start.
I am sure that OPEC realizes by now that this is a globalist banker attack on the Saud specifically. You can't have a globalist technocratic empire when there are still monarchies mucking about.
Nothing in Plato's Republic that says "except for the evil and corrupt Saud.
It's SA's responsibility because we've put those fucking sickos in business.
Because you formed a cartel to control the price? lol hows than one working out for ya. Might want to study up on the prisoner's dilemma sometime.
Maybe someone can convince Daesh to cut back their production?
https://twitter.com/IraqLiveUpdate/status/650065210489876480
It is Obama's oil war against Russia and Putin. OPEC is a red herring.
Stakes are high as US plays the oil card against Iran and Russia
John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.
The Saudis did something similar in the mid-1980s. Then, the geopolitical motivation for a move that sent the oil price to below $10 a barrel was to destabilise Saddam Hussein’s regime. This time, according to Middle East specialists, the Saudis want to put pressure on Iran and to force Moscow to weaken its support for the Assad regime in Syria.
http://www.theguardian.com/business/economics-blog/2014/nov/09/us-iran-r...
While I agree with this assesment the sustained fall in oil prices has probably been compounded by the strengthening of the dollar. Until supply/demand picture changes I don't imagine oil prices can manage any long term gains unless the dollar start dropping significantly.
Shhh...
You are not allowed to mention that the USD is stonger now than it has been in at least 10 years...
This is Zerohedge, the dollar is perpetually on the verge of utter collapse...
... and the EUR is perpetually on the verge of utter breakup
And the yuan is on the verge of global reserve currency domination .....at 2.79% of global transactions. But that's higher than the yen!!
PS. For those of you who do not want your worthless dollars, send them to me. I'll give them a good home.
Give some thought to what Big Oil gets out of this as well: what better a way for Exxon etc to shut down those pesky shale oil producers than get the rugheads to do their dirty work.
Saudi P.R. piece.
"Why is it that the responsibility for balancing the market falls on OPEC? Why should OPEC be the one to fix the imbalances in the global crude oil trade?"
Well, because that's OPEC's stated raison d'etre:
"...the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry."
-http://www.opec.org/opec_web/en/about_us/23.htm
They were formed to control the price of oil, so if they no longer want that responsibility (or are unable to form a consensus among oil producers), then they should admit their failure, disband and allow for a truly free market to set the price of oil.
"That adjustment – high-cost suppliers forced out – is how markets are supposed to work.
Oh please. You can't seriously expect anyone to believe that there is a functioning market for oil! There's a reason we call OPEC a cartel.
It's time to admit that OPEC is an anachronism. Their time has passed. They profited handsomely for the time they were able to control the supply of a basically cheap and unlimited commodity, but they can't anymore. Saudi Arabia will fall from dominance and all the Muslim crazies they have sent out into the world will come home to roost.
Damn, that's a good comment. +1.
oil "market" indeed. How oil is priced is batshit insane, and good only for the skim a precious few take.
Imagine that the world thought it reasonable that GM or Ford could take as much market share as possible, and Toyota was expected to slash production if there weren’t enough customers left over.
So you know guys..this is exactly what trade deals are doing to north american made cars being sold in asia. Here, sales are mostly even(ish). But in asia, the market share is ALL their's and we get to pick up scraps of sales. Not fair trade at all. If only we were allowed to flood japan with cheap mustangs...
I don't feel sorry for the fracking jobs lost. The whole world enabled those jobs by paying too much for oil.
Saw gasoline for 2.06 on Rockville Pike near Nicholson Lane this weekend. That suggests
prices in rural VA/NC along the I-95 corridor are likley sub-2.00 or will be by Thanksgiving.
Drill here. Drill now. Pay less. Seems like no truer words were ever uttered....
Blaming OPEC for low energy prices? Because it is a bad thing when I pay lower oil prices, right?
"Blaming"..."crediting"...
It's all about perspective. I don't own oil futures...but I do plan to put gas in my car in the future so let me know who to thank when you get it all figured out.
I think its Bush's fault.
I think it is Obama's fault.
All of the oil over supply in the world is USSA oil. The Americans killed the oil price.
Man, I hate low prices. Can I pay more somehow?
If you judge things as good based on freedom and justice and consumer interests, you view articles like this one and the history of criminal government meddling with petroleum markets, and your eyes just cross, vision dims, the circle of Willis pops, and you're gone...... even before you can mumble something about wanting unfettered competition.
Why does it have to be anybody's fault if a price of an item decreases. It is what it is...let the market figure it out... anyway I am still struggling to adjust to the lower oil prices...but I will be ok.. :)