Powerful cartel faces potential schism: Can OPEC survive falling oil prices?

Powerful cartel faces potential schism: Can OPEC survive falling oil prices?

The Organization of the Petroleum Exporting Countries (OPEC) has dominated the global supply of oil since its inception in 1960. The 12 member countries combine for approximately 80 percent of the world’s crude oil reserves. The economies of these countries are incredibly oil dependent. The recent drop in global oil prices has caused dissension within the organization as the member countries cannot agree on how to handle the commodity crisis.

 

The global market for oil is highly saturated and as prices have continued to decrease, oil production has spiked to an all-time high. Brent crude oil and WTI crude oil prices have dropped from over $100 a barrel in 2013 to between $48.14 and $44.63 a barrel today. A recent report from Goldman Sachs claims that oil price could drop all the way into the $20 range.

 

As a group, OPEC is producing more oil than ever, increasing its combined output to 31.51 million barrels a day. Supply should see a significant increase over the next few years, now that Iran has reached an agreement with western powers to curb their nuclear program in exchange for a lessening of international sanctions on their economy. Iran is home to one of the largest fleets of oil supertankers in the world and has a significant amount of oil reserves stored up. OPEC officials have decided not to slow down oil production for fear of losing market share to competitors, such as the United States and Russia.

 

Chart from OPEC

(OPEC)

At the current levels of production and prices, many OPEC countries are operating at a loss. According to The Wall Street Journal, half of OPEC’s member countries — Algeria, Iran, Iraq, Libya, Nigeria, and Venezuela — need oil prices to be over $100 a barrel in order to balance their government budgets. Iraq, Nigeria, and Venezuela are facing the drop in oil prices, while at the same time trying to control domestic strife. Iraq is in the midst of violent conflicts with the terrorist group, ISIS; Nigeria is dealing with its own internal violence and has recently suffered a serious outflow of foreign capital; and Venezuela is on the verge of hyperinflation as prices rose approximately 68 percent year over year as of December 2014.

 

OPEC is not supposed to meet again until December 4. However, Algeria, Iran, and Venezuela are all in favor of holding an emergency meeting before the next scheduled date. The next meeting, whether it happens on December 4 or sooner, could set up a showdown between the countries that can afford to keep oil prices high and those that cannot. With national interests pulling them in different directions, it will be interesting to see if OPEC’s member countries can stay united.

 

Will OPEC remain united throughout the commodity crisis? How long will it take for oil prices to rise back up? Feel free to leave a comment or find me on Twitter @Andrew_Morse4

Andrew Morse

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