OPEC Meeting Could Throw Off Global Energy Markets
By Willard G. McAndrew III
This Thursday the leaders of OPEC will meet in Vienna to try and stabilize global oil prices. Over the last two months we’ve seen about a 20 percent drop in oil prices. While that may be good news for Americans here at the pump, there are many other factors at work here.
First off, OPEC wants to see consistency in oil prices. The last thing that they want to see is the situation they had three years ago when the price of oil went down to about $30 per barrel.
OPEC wants to see oil at $100 per barrel, which is a good number for all of them. If that doesn’t happen things can get pretty contentious. Remember Iran’s cost of production is extremely high. It costs them a little under $85 per barrel to produce oil. While the global price of oil is above this level, Iran is dangerously close to the brink. There is even talk that Iran now has to use credit and third party brokers just to move their oil, which decreases their overall net return.
While some have suggested that countries who produce oil cheaply like Saudi Arabia could be putting the squeeze on Iran, I don’t think they want to pick that fight. Iran’s has been simmering and if Saudi Arabia keeps increasing production and lowering the price of oil, Iran will boil and burn. In that scenario, you would see the Strait of Hormuz closed down and the price of oil jump up about $20 immediately, which would coincidentally bring the number to over $100.
That being said, I don’t really see OPEC making a significant change in production. Half of the members want to see production slow down so that they can get a higher price, like Iran. The other half wants to increase production to finance their governments or make extra money in light of the pending July 1 Iran boycott. This will likely mean that production will remain steady, although the recent trend from OPEC has been to overproduce. The OPEC quota is only 30 million barrels per day, yet they have been producing over 31.8 million barrels per day.
This overproduction has been led by Saudi Arabia, which is now producing an astonishing 10 million barrels per day. Iraq has already increased production to 2.5 million barrels per day and is steadily rising due to new terminal facilities. Libya’s production is coming back on faster than expected after their civil war and their crude is some of the best blending crude on the market.
Ideally, OPEC wants to see oil prices not too high and not too low. They don’t want to make the price too high and have more types of energy look appealing for investment and they don’t want it too low that they can’t pay their bills. Countries with huge cash and gold reserves such as Saudi Arabia and Bahrain can take a downturn, but countries who are struggling or getting back on their feet like Iraq, Iran, and Libya cannot.
I believe that the $100 per barrel is a number now that even the countries buying the crude and the consumer buying the refined products have accepted, give or take a few dollars either way. OPEC knows that it can get $100/barrel oil and not upset global economic stability.
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