OPEC Deal: Full of Surprises or Warnings?

OPEC’s deal to cut production may cause a general shortage in oil, but it can also be a great economic opportunity for the rest of the nations that are rich in oil.

The OPEC deal continues to be a rather pleasant surprise as well as a warning. The recent announcement to cut oil production by 4.6% immediately raised oil prices by almost 9%. The consequences of the implemented supply policy are awaited.

OPEC produces a third of the world’s crude oil. The newest agreement has some outcomes that need to be outlined first. It will set OPEC’s production at the level of 32.5 million barrels a day, starting in January 2017. This is a decline of 1.1 million barrels a day from the volume in October 2016. Just Saudi Arabia, the OPEC’s biggest producer, will decrease its output by 500,000 barrels a day. Since Iran was against this proposition and wanted to retain its levels of production, OPEC will allow it to raise production by 90,000 barrels a day, but to stay below 3.8 million barrels a day. Non-OPEC economies, like Russia have already agreed to cut production by 300,000 barrels a day. In addition to this, there have been political influences on oil production, much before the agreement or its thought process; production in Libya and Nigeria has been affected due to armed conflicts.

The goal of the decision is obvious: to raise the price of crude oil. The current oil price is $49.20 per barrel and one can only expect it to rise more and more. There are predictions that the price would climb to $60 a barrel. The deal might also be the demonstration that the real world’s power is in the hands of those who have the natural resources. Especially today when they are so rare and so expensive.

The US answers the question with pizzazz. Its 25 oil rigs and shale industry may be the liberators. Other non-OPEC economies, like Canada, Brazil and Kazakhstan have announced that they will raise their production to 500,000 barrels a day next year, which should (more than) compensate the OPEC’s decline in production. Russia on the other hand, cannot sustain a production cut, being the current largest producer; its several reserves could freeze off, making it difficult and expensive later on to drill.

Still, the oil producers should be very cautious since the demand today is much lower than before, and constantly declining; so, an unprofitable situation in production or surplus supply may occur any day. This also could undermine the OPEC deal. Let us be clear that most of the OPEC economies are majorly oil-dependent nations and cannot afford a cut in the long term. The best example is Venezuela with its enormous inflation. Even though some argue that the year was oversupplied with oil, and predict the same for next year, OPEC’s decision might actually cause shortage of oil. As an aftermath, the value of shares of companies that are dependent on oil prices may decrease, and will sure see a drastic change in the next few months. The common man, the last and latest victim in the chain of events, will be the one to witness price rises, struggle for survival and in the end, resign to rising prices. In the meantime, banks will struggle with debt collection, especially those connected with oil investments. A decline in consumption as well as production would be the next scenario. And soon, a new recession will knock on our doors.

Be the first to comment

Leave a Reply

Your email address will not be published.