That means one of the three major underpinnings of the Saudi-inspired move won’t go as planned for the kingdom. It indicates the weakening of OPEC’s real influence in contemporary oil markets, and likewise illustrates the cartel’s rising desperation.
Now don’t get me wrong. Saudi Arabia has plenty of reserves, as do some other cartel members. There are no plans any time soon for a bake sale to raise revenue for these countries.
But the main OPEC producers don’t exactly have diversified economies, and rely on exporting raw materials while importing just about everything else.
Even the Saudis are running an expanded budget deficit. Of course, Riyadh’s current hard currency reserves could easily support that deficit for the next three generations. And that means this is not essentially about money, at least for the dominant producer in OPEC.
For the Saudis, it is about something else entirely: Leverage and influence.
My suggestion earlier this week that last week’s production decision has only bought OPEC a few years seems right on the mark. The cartel is rapidly losing its ability to establish international prices.
Controlling 40% of the world’s oil production just doesn’t buy what it did a few years ago.
OPEC has not set prices directly for some time in any event. Rather, it has attempted to control the supply. Each month it estimates global demand, deducts from that non-OPEC production, with the remainder being something referred to as “the call on OPEC.”
That “call” is then divided among OPEC members into monthly export quotas.
Except that formula has been broken for some time, leaving the Saudis, as the main balancer within the cartel, in a difficult position. The Saudis are left to offset pressures within OPEC against external factors over which they have fading real control.
OPEC’s Days Are Coming to an End
All of this leads us to three separate reasons why the days of OPEC as an energy monolith are numbered.
First, the ranks are breaking within the organization. Saudi Arabia, Kuwait, and the United Arab Emirates (of which Dubai is one of the seven members) can withstand the present price reductions. Others in OPEC cannot.
Leading this list of weaker members are Venezuela, Nigeria, and Iran. Each requires a price per barrel of more than $100 to fund their very precarious central budgets. That has already caused these three (and others in the group) to exceed their monthly quotas. They have been forced to sell more for less, and the Saudis can do little about it.
Of course, that merely exacerbates the global picture on the supply side. As this environment persists, OPEC speaks less as a single (Saudi-led) voice. The cartel is fraying and the situation will deteriorate even further following the Iraq-Kurdistan agreement yesterday, which is certain to open the market to additional Iraqi exports.
Coming out of a prolonged period of conflict, Iraq doesn’t even have a monthly OPEC quota yet. When it does receive one, Iraq will be poised to increase exports significantly and will be moving volume at the expense of other OPEC quotas. Don’t expect that to go down easily among the other members.
As for the other two fronts, they are external – the battle with Russia over the Asian markets and the duel with the U.S. over unconventional production.