OPEC seems clueless as to how to deal with oversupply of oil
When asked what oil-producing nations should do to weather the onslaught of financial pain from falling crude prices, the Secretary General of OPEC had one suggestion: diversify.OPEC has always been about maximising profits, but with the shale revolution it has lost that ability and it has also lost its market discipline. The shale producers in the US have put a ceiling on the prices OPEC can demand and their attempt to drive them out of business with a market share policy has turned into a suicide pact. With the US consuming less OPEC oil and relying more on domestic production they seem to have lost the leverage they used since the 1970's.
“They have to find another source of income,” OPEC Secretary General Abdallah El-Badri said during a panel at IHS CERAWeek in downtown Houston on Monday, adding members of the cartel shouldn’t rely too heavily on oil revenues to support their economies. “The situation has changed now.”
It was a stark reminder of the financial trauma OPEC nations like Venezuela and others like Russia have been through since late 2014, and a grim warning for the future. The OPEC director appeared less optimistic about the chances of an oil-price recovery beginning in 2017 than the International Energy Agency’s executive director Fatih Birol, who shared a stage with El-Badri.
“Unless we figure out (how to deal with the oversuppy), it will stay with us, for I don’t know how many years,” El-Badri said. “I hope that we can solve this is 2017 but this cycle is very nasty.”
The International Energy Agency estimates OPEC oil revenues have fallen from $1.2 trillion in 2012 to $500 billion last year, and it could sink to $320 billion this year if prices stay low.
Some signs of thaw between the Organization of Petroleum Exporting Countries and nations outside the cartel have emerged recently. El-Badri said Saudi Arabia and Russia’s recent agreement to freeze their oil production is just the first step to “see what we can achieve.”
“Maybe if we’re successful, we can freeze production and just keep it as it is, and see how things develop,”El-Badri said.
Russia, Saudi Arabia and a few other OPEC nations last week agreed to freeze production but only if other major producing countries join them in capping their output.
Iran and Iraq have applauded the recent cooperation between the producers but neither committed to the freeze. Iran expects to pump half a million barrels of additional crude in coming months.