In an event that went largely unnoticed, we have, in fact, passed the point where OPEC's key member Saudi Arabia can dictate oil prices any longer. No one seems to have taken in the momentous occasion if not comprehended its historical significance. Much hasn't been said or written, it has to be added.
Long time readers of oil-price.net will recall how as early as 2012 we had not only predicted the takeover of the entire region by ISIS, but also anticipated in 2013 that a surge in oil price volatility was on its way. In addition, we carried a comprehensive analysis, just weeks before the oil price collapsed.
Today we are at a similar turning point of a major milestone clustered with many defining clauses. Consequently, there are some drastic geopolitical implications for all nations from the producers of the Middle East to western democracies; from consumers in Asia to Europe. The world is about to change. Here's how.
OPEC is a consortium of thirteen countries, headquartered in Vienna. Together, these countries account for about 40% of oil production and more than 70% of world's proven oil reserves. For the past four decades OPEC has had a wide ranging of influence on the oil sector, and thus on the energy scene of the world. Simply put, OPEC is a cartel whose goal, since its creation in 1960, has been to coordinate oil prices in order to ensure that oil producers received a steady stream of income. The mechanism used by OPEC to control oil prices has been fairly straightforward; in technical parlance it's a "hysteresis cycle", the same logic used by a thermostat to control room temperature.
That is, if oil prices climb too high, OPEC decides to sell a little bit more of oil in the open market so that the oil prices go down. This is to avoid slowing first-world economies which would cause them to import less oil. In other words, it takes the sting off its tail.
On the other hand, if oil prices fall too low OPEC reduces oil production so that oil prices spurt. With cut in supplies, demand rises, after all. This way OPEC wrestles to keep oil prices high enough to maximize profits. This hysteresis cycle started in the 70s itself when reduction in oil production by the cartel led to immediate spike in oil prices. In the eighties, OPEC started to set production targets to streamline the oil price. In April 2001, OPEC reduced production by one million barrels, whose effect as oil price increase was felt in the US, almost immediately. And, in November 2006, it reduced production by 1.7 million barrels so as not to sledge off the prices below the $50 per barrel mark. You see, the cartel had clout.
Now the scene moves to Saudi Arabia. The kingdom being the largest producer of OPEC, has become the de-facto leader that few OPEC members dared oppose. During its first 54 year history, this mechanism worked great for OPEC, so why upset the apple cart, opined the rest of the OPEC members. After all, the said mechanism guaranteed a steady oil supply which, in turn, fuelled economic exchanges and progress during the last half-century with an unprecedented increase in prosperity worldwide.
Meanwhile thanks to new unconventional methods, the American oil revolution was well underway and when in 2014 the US passed Saudi Arabia as the first oil producer, Saudi Arabia, naturally, did not like it. Clearly, it was used to everyone bowing to its tune. And so Saudi Arabia decided to deal with US oil producers like the dictatorship usually deals with its opponents: a public beheading for everyone to see. Unexpected to everyone, the Saudis forced OPEC to increase production. It calculated that oil prices would plummet and the US producers would be priced out of the market. The logic was sound as fracking remains an expensive process
This move from Saudi Arabia was, of course, historical. No-one could have predicted nor anticipated. Not even Warren Buffett, usually right, but who recently admitted of his mistake in investing in Conoco Phillips because of the whole "peak oil" thing.
And, here's the rub, it worked. The string of bankruptcies which ensued rivalled the size of the telecom bust. Close to 70 oil and gas companies in the US filed for bankruptcy in the US so far, with more to come. The scheme set in motion by Saudi Arabia was gaining momentum.
Saudi Arabia not only harmed other OPEC member countries, but also lost all its credibility. And, reputation is one that that is difficult to salvage once lost. Saudi Arabia did what it did, but the effect was felt by all. Breaking the rules of OPEC caused extreme hardships for other OPEC members. For example, Venezuela and Nigeria's oil payments contribute more than 90 percent of their total revenue from exports. Now, after Saudi's ill timed move, both countries are not only crumbling under massive revenue loss because of low oil prices but are also on the brink of famine and civil war.
Ever since then, OPEC hasn't been able to act in a cohesive coordinated way. So much so, OPEC meetings nowadays beget mayhem as member don't respect quotas any longer and are just happy to 'get something' for their oil. OPEC's clout has crumbled. The cartel has lost the cohesion that once made it strong.
Evidently, harming the American Oil revolution cost Saudi Arabia support from US oil lobby. For decades, the Saudis and the US oil industry was a match made in heaven. It was a honeymoon phase all along. Generous oil contracts were handed to US oil companies to develop the Kingdom's vast oil resources. Saudi Arabia hired lobbyists to curry favour in the political arena too. After all, US oil companies are political heavy weights. Understandably many past US presidents from both parties had dubbed Saudis a key ally in the region.
However, the numerous oil bankruptcies in the US built resentment throughout the US oil industry. It turned out harming the US oil industry to be was an ill-fated political move by Saudi Arabia which lost its most influential ally in Washington. Also, it's an election year in the US and politicians, both Republicans and Democrats, do not want to be seen courting Saudi Arabia.
more
Saudis lose US clout over oil price war
Long time readers of oil-price.net will recall how as early as 2012 we had not only predicted the takeover of the entire region by ISIS, but also anticipated in 2013 that a surge in oil price volatility was on its way. In addition, we carried a comprehensive analysis, just weeks before the oil price collapsed.
Today we are at a similar turning point of a major milestone clustered with many defining clauses. Consequently, there are some drastic geopolitical implications for all nations from the producers of the Middle East to western democracies; from consumers in Asia to Europe. The world is about to change. Here's how.
OPEC is a consortium of thirteen countries, headquartered in Vienna. Together, these countries account for about 40% of oil production and more than 70% of world's proven oil reserves. For the past four decades OPEC has had a wide ranging of influence on the oil sector, and thus on the energy scene of the world. Simply put, OPEC is a cartel whose goal, since its creation in 1960, has been to coordinate oil prices in order to ensure that oil producers received a steady stream of income. The mechanism used by OPEC to control oil prices has been fairly straightforward; in technical parlance it's a "hysteresis cycle", the same logic used by a thermostat to control room temperature.
That is, if oil prices climb too high, OPEC decides to sell a little bit more of oil in the open market so that the oil prices go down. This is to avoid slowing first-world economies which would cause them to import less oil. In other words, it takes the sting off its tail.
On the other hand, if oil prices fall too low OPEC reduces oil production so that oil prices spurt. With cut in supplies, demand rises, after all. This way OPEC wrestles to keep oil prices high enough to maximize profits. This hysteresis cycle started in the 70s itself when reduction in oil production by the cartel led to immediate spike in oil prices. In the eighties, OPEC started to set production targets to streamline the oil price. In April 2001, OPEC reduced production by one million barrels, whose effect as oil price increase was felt in the US, almost immediately. And, in November 2006, it reduced production by 1.7 million barrels so as not to sledge off the prices below the $50 per barrel mark. You see, the cartel had clout.
Now the scene moves to Saudi Arabia. The kingdom being the largest producer of OPEC, has become the de-facto leader that few OPEC members dared oppose. During its first 54 year history, this mechanism worked great for OPEC, so why upset the apple cart, opined the rest of the OPEC members. After all, the said mechanism guaranteed a steady oil supply which, in turn, fuelled economic exchanges and progress during the last half-century with an unprecedented increase in prosperity worldwide.
Meanwhile thanks to new unconventional methods, the American oil revolution was well underway and when in 2014 the US passed Saudi Arabia as the first oil producer, Saudi Arabia, naturally, did not like it. Clearly, it was used to everyone bowing to its tune. And so Saudi Arabia decided to deal with US oil producers like the dictatorship usually deals with its opponents: a public beheading for everyone to see. Unexpected to everyone, the Saudis forced OPEC to increase production. It calculated that oil prices would plummet and the US producers would be priced out of the market. The logic was sound as fracking remains an expensive process
This move from Saudi Arabia was, of course, historical. No-one could have predicted nor anticipated. Not even Warren Buffett, usually right, but who recently admitted of his mistake in investing in Conoco Phillips because of the whole "peak oil" thing.
And, here's the rub, it worked. The string of bankruptcies which ensued rivalled the size of the telecom bust. Close to 70 oil and gas companies in the US filed for bankruptcy in the US so far, with more to come. The scheme set in motion by Saudi Arabia was gaining momentum.
Saudi Arabia not only harmed other OPEC member countries, but also lost all its credibility. And, reputation is one that that is difficult to salvage once lost. Saudi Arabia did what it did, but the effect was felt by all. Breaking the rules of OPEC caused extreme hardships for other OPEC members. For example, Venezuela and Nigeria's oil payments contribute more than 90 percent of their total revenue from exports. Now, after Saudi's ill timed move, both countries are not only crumbling under massive revenue loss because of low oil prices but are also on the brink of famine and civil war.
Ever since then, OPEC hasn't been able to act in a cohesive coordinated way. So much so, OPEC meetings nowadays beget mayhem as member don't respect quotas any longer and are just happy to 'get something' for their oil. OPEC's clout has crumbled. The cartel has lost the cohesion that once made it strong.
Evidently, harming the American Oil revolution cost Saudi Arabia support from US oil lobby. For decades, the Saudis and the US oil industry was a match made in heaven. It was a honeymoon phase all along. Generous oil contracts were handed to US oil companies to develop the Kingdom's vast oil resources. Saudi Arabia hired lobbyists to curry favour in the political arena too. After all, US oil companies are political heavy weights. Understandably many past US presidents from both parties had dubbed Saudis a key ally in the region.
However, the numerous oil bankruptcies in the US built resentment throughout the US oil industry. It turned out harming the US oil industry to be was an ill-fated political move by Saudi Arabia which lost its most influential ally in Washington. Also, it's an election year in the US and politicians, both Republicans and Democrats, do not want to be seen courting Saudi Arabia.
more
Saudis lose US clout over oil price war