OPEC CUTS OIL PRODUCTION: WHO WINS?

On November 30^th, the biggest organization of oil exporters worldwide signed an agreement which will cut oil production by next January. Today, OPEC members represent 1/3 of total oil production in the world and it’s formed by 13 members. Among members, there are nations of Middle East, such as Saudi Arabia and Arabian Emirates, African countries, such as Angola and Algeria, and South America members, such as Venezuela and Ecuador. In this cartel are not present other important oil producers, such as USA and Russia, which are the main competitors of OPEC. The story of this deal, which, for the first time since 2008, will cut oil production of 1.2 million barrels per day, began a few years ago. In the last decade, USA has doubled its oil production, owing to Freaking, a method that allows to extract small quantities of oil almost everywhere. The result is that, at the end of 2015, USA became the first oil producer in the world. This increase has produced, in the last years, an excess of supply related to demand: in 2015, Total oil daily production was of 95.80 million barrels, when total world consumption was of 94,07 million barrels. This means that, at the end of 2015, the barrels not sold were 631 million. This over-production has caused, in 2014, a rapid price decrease. The price of a barrel in august 2014 was of 100 dollars, but in December 2014 became 55 dollars. In February 2016, the price reached 30 dollars, which was the minimum price since 2002. This price descent affects the exporter countries, whose GDP (gross domestic product) is composed largely by oil revenues. Oil members, this year, will earn from export 341 billion dollars against 753 billion in 2014, before price crashed. In previous months, Countries of middle East, such as Arabia and Qatar, have been made to request the first state bonds since a lot of time, to fill the lack of money in their balances.

But why, only right now, it has been decided to cut production?  Well, the answer is related to a “war” in the shares of worldwide production. Saudi Arabia, the main OPEC producer, was determined to diminish USA production, in order to exclude United States from the market in the long run. In fact, the freaking production, which represent the larger part of USA output, has more expensive costs than traditional production. So, keeping price lower, according to Saudi Arabia, had to compromise the revenues of freaking companies. However, during this time, freaking companies have succeeded in reducing costs. This allowed them to survive and, in addition, they have also increased the production. For this reason, it was inevitable that the only possible solution was lowering production. However, inside OPEC exist many different positions and many different interests. For instance, Iran didn’t want to decrease. That’s because, after the sanctions in the previous years, which limited its export, it was determined to recover what it had lost. However, the strong necessity to limit losses, for OPEC members, made them to find a solution. The final agreement, in effect on 1^st January, will cut the production of all members of around 5%, except for Nigeria and Libya. Also Russia, that is not an OPEC member, has formally expressed that will decrease production too. Markets reacted positively about this decision: the quotation of Oil is going up and it exceeded 50 dollars, in the previous hours.

According to some analysts, this decision, if respected, will raise Oil price over 100 dollars in the next years. This scenario, more than OPEC members, will help USA. Donald trump wants to sustain oil industry, eliminating rules and restrictions, introduced by Obama Presidency. They will probably enforce their leadership in the market and exports are going to increase in the following years. It’s expected a huge growth in this sector.

This decision will affect also the countries which are oil importer, like Italy. Inflation could raise, but related to an increase in costs and not to an increase in demand, and expenses for import Oil could be higher. These events are not sure good for countries like Italy, which need desperately to cut debit and increase demand for goods and services. However, before reaching some conclusions, it’s better waiting the effective market results and, above all, if the deal, signed in Wien, will be effectively respected.

A cura di Eugenio Baldo.