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Could This Be OPEC’s Long-Term Goal?

Could This Be OPEC’s Long-Term Goal?

Delayed gratification is said to be a sign of maturity. By that standard OPEC at age 55 demonstrated its maturity this week as it left oil production quotas for its members unchanged. It did so in the face of oil prices that are about 40 percent lower than they were at this time last year, delaying once again a return to the $100-per-barrel prices seen during the past four years.

Related: OPEC Set To Play The Waiting Game

Why OPEC members chose to leave their oil output unchanged is no mystery. The explicit purpose for keeping oil prices depressed is to close down U.S. oil production from deep shale deposits--production that soared when oil hovered around $100 a barrel, but which is largely uneconomic at current prices. That production was starting to threaten OPEC's market share.

If OPEC were to cut its oil production now and drive prices back up, it would only lead to increased drilling in the United States and loss of market share. In fact, even as spot oil prices sank below $45 per barrel in the United States earlier in the year, investors continued pumping money into U.S. oil drilling. According to The Wall Street Journal U.S. oil companies sold almost $17 billion in new shares in the first quarter of 2015, more than they sold in any quarter last year when prices were much higher.

Preliminary estimates by the U.S. Energy Information Administration show that oil production continues to grow in the United States despite low prices. (The final numbers won't be in for months.) New investors in U.S. oil company shares must believe they are catching the bottom and will have a very profitable ride up from here. This demonstrates that OPEC's work is not done and accounts in part for the decision to leave production quotas unchanged. Related: Global Oil Shortage Before Year’s End? Surely Not…

OPEC's next task is to convince those making new investments in oil that rather than catching a bottom in oil prices, they have caught a falling knife. The cartel must dampen enthusiasm for investment for the long term if the organization's members are going to benefit. A crippled U.S. oil industry without friends in the investment world is the only way to assure that rising prices won't simply lead to a stampede back into U.S. shale deposits.

How long will investors in those deposits have to suffer before they say, "Never again"? My guess is at least another year. And, the pain for those investors might get much worse in the meantime. With the prospect of a nuclear agreement between Iran and the United States and Europe, Iranian oil exports could ramp up considerably as economic sanctions end. Disruptions elsewhere--Nigeria, Libya, and Iraq, for instance--might ease and further add to world exports.

For Saudi Arabia, OPEC's largest exporter, winning the oil price war with U.S. producers in the next year may be part of a broader strategy meant to maximize Saudi revenues as production in the kingdom hovers at an all-time high over the next decade before beginning a decline.

The Saudis have already said they have no plans to expand beyond their current capacity of around 12.5 million barrels per day. Is this because they choose not to or because they can't? Only the Saudis know. The idea that the country is essentially on a production plateau that may not last for the long term would explain why the Saudis want to crush the U.S. domestic oil industry now rather than wait for declines in U.S. production expected after 2020. Related: Concerns Over Earthquakes Spread To Texas

Under this scenario the Saudis want to raise prices, while maintaining their current volumes, well before then in order to take maximum advantage of their record all-time flow rates that could be over by the mid '20s. This scenario has major implications for a world that as recently as 2011 was counting on more than 15 million barrels per day from Saudi Arabia by 2035.

By Kurt Cobb

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  • John Scior on June 09 2015 said:
    Good analysis. I would like to add that perhaps too, OPEC is looking at the developments in alternative transportation fuels and/or electric cars as competition to their product. These make sense at 100 per barrel or more and gasoline hovering around 4 per gallon, not so much so at lower prices. Keep in mind, their reserves are like a huge bank of wealth that may become confederate currency if say cellulistic ethanol becomes widespread or surplus fracked natural gas is converted to cheap methanol. Then there is Tesla which is pushing EV technology toward newer frontiers. They want as much of their easily obtained low hanging fruit to be picked before we all switch from whale oil to kerosene and electric lights if you catch my drift. The tight oil will always be there ready for the time when scarcicty returns and oil prices are on the rise again, but they want to sell as much oil as they can before, in economic terms, we all switch to viable substitutes.
  • ECalderera on June 09 2015 said:
    What many may not see in all of this is that the Saudis are looking around their neighborhood and they don't like what they see with ISIS and Iran pushing down on them. They may also want to cripple Iran before the deal is made (if it is ever made) as well as cripple ISIS funding on the black market. Both players do represent an existential if not immediate threat to the kingdom.
  • Walter LIbby on June 09 2015 said:
    Say the Saudi's cut production and oil prices rose as a consequence slowing down the global economy that is already slowing down... from theendpoint.

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