Saudi Arabia did it. After stonewalling for weeks, all attention is on the House of Saud and its refusal to let OPEC cut production, even by a modest 2 million barrels a day. The immediate impact of this decision was felt with WTI falling to $65.99, its lowest point in over four years, while Brent settled at $70.07 after a near $7.67 drop. That Saudi Arabia thought this to be “a great decision” shows the defiance of the former top global oil producer when confronted with a new energy world order. The news also handed out a battering to oil stocks, with Premier Oil falling by 7%, with Statoil, Total and Shell all down around 4%.
Despite this immediate impact, Western powers quickly moved to dispel concern about the impact of this decision on their economies. Canadian Finance Minister Joe Oliver stated that Canada had not counted on an OPEC deal, saying that “when we took into account the oil price decline…we made the assumption that the prices would stay at the low level for the entire period.”
Tellingly, far more ink has been poured on whether OPEC has made a severe miscalculation and what this could cost them. USA Today quotes experts as saying that “every time OPEC fails to act it becomes even less relevant.” Seeking Alpha goes one step further, examining in detail how this could lead to OPEC’s breakup, especially with many of its poorer members aghast at the decision and Venezuelan Oil Minister Rafael Ramirez storming out of the conference once the verdict was final.
Urgent Note: Our market analyst, James Hyerczyk has assessed the fallout from OPEC’s latest meeting and how it will impact the crude oil futures markets in the coming months. For those of you looking to take advantage of the current environment in oil stocks or to protect yourself from further downside, James’ report is a must read and you can receive it for Free – just click here and start a 30 day free trial to Oilprice Premium.
The reasons for such a breakup are numerous. Congress is growing closer to lifting a ban, with a hearing set for December 11 in the House. Russia needs high oil prices to stay financially stable, especially with economic troubles and political sanctions costing well over $100 billion a year. The shift in production power to the U.S., allied with the likes of Canada, Mexico and Brazil, has exposed the deep divisions between OPEC members that were once papered over in the name of joint economic prosperity. If the shale boom truly makes the U.S. energy independent and the oil export ban is lifted, certain OPEC members may shift their allegiance.
Much has also been made of the fact that low oil prices will also help the gas-guzzling U.S. economy at the pump, while also trickling down to help consumers in Europe and Asia. MarketWatch is clearly loving this situation, crowing that those who will suffer are hardly U.S. allies. It estimates that with production ever fluctuating, Libya needs prices at $185 a barrel to balance its budget, while Iran needs $133, and Russia needs $100. “The rogue states’ cash flow can’t handle it. OPEC’s low-cost producers are Western-friendly powers like Kuwait.” Its economic analysis continues with the fact that U.S. shale-oil production is expanding by the capacity of Libya every year, and that American production would still be boosted at $60 a barrel, albeit in a limited fashion. Its final rhetorical flourish is perhaps a tad over-played but is emblematic of markets that are not as worried about OPEC’s decision: “If shale’s job is depriving rogue regimes of oil leverage, it’s done.”
On another front, the pitched battle between the White House and the Republican-controlled Congress over the EPA has only intensified, this time concerning emission standards. On Wednesday, President Barack Obama introduced legislation that would update the standard for ground-level ozone measurements. The EPA has long been pushing for such new rules, linking ozone to an increased prevalence of asthma and heart disease. The GOP leadership savaged the move, saying that it placed “burdensome and costly” regulations at a “time of economic distress.” It also highlighted that the White House had stopped the EPA from issuing the same legislation in 2011, citing hypocrisy from the President at a time when he is picking a fight over environmental issues.
On Tuesday, the Supreme Court also agreed to consider industry criticisms of standards for mercury, arsenic and other pollutants emissions from power plants. The governments of 21 U.S. states, backed up by powerful lobbying groups, have appealed to the highest court in the land after the Court of Appeals for the District of Columbia upheld the administration’s view on the standards. With the same diseases in mind, the EPA accepts a costly $9.6 billion per year would be needed for enforcement but believes tens of thousands of premature deaths, heart attacks and asthma attacks would be prevented.
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By. James Stafford of Oilprice.com