Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Stop Blaming OPEC For Low Oil Prices
Al-Jazeerah, CCUN, November 2, 2015
We are a little more than a month away from OPEC's next meeting, which
will be held in Vienna on December 4, 2015.
OPEC altered the course
of the oil markets last year when it decided to cast aside its traditional
role of maintaining balance through production cuts. Instead it pursued a
strategy of fighting for market share, contributing to an immediate rout in
oil prices. WTI and Brent then went on to dive below $50 in the weeks
following OPEC's decision.
OPEC is widely expected to continue its
current strategy at its next meeting, and as such, no rebound in oil prices
is expected, at least not because of the results of the group's meeting in
But that raises a question about what the world of oil
expects from OPEC: Why is it that the responsibility for balancing the
market falls on OPEC? Why should OPEC be the one to fix the imbalances in
the global crude oil trade?
On the one hand, it makes a certain
degree of sense that market watchers anticipated adjustment from OPEC. After
all, the group has historically coordinated its production levels in an
effort to control prices, or at least influence them. They could cut their
collective production target to boost prices, and vice versa.
However, there is an element of imperialism and superiority in the
expectation that the burden should fall on OPEC, which is largely made up of
producers from the Middle East. It is a bizarre mentality to think that
private companies deserve to seize as much market share as they can manage,
after which OPEC producers can take what is left. Steven Kopits, President
of Princeton Energy Advisors, laid out the concept very nicely in a
Platts article earlier this year, in which he says the expression "call
on OPEC" should be scrapped.
Kopits offers an interesting thought
experiment. If the industry in question were, say, automobiles rather than
oil, there is no question that such an arrangement would not be framed in
the same manner. Imagine that the world thought it reasonable that GM or
Ford could take as much market share as possible, and Toyota was expected to
slash production if there weren't enough customers left over. It is an
absurd scenario, but not so different from the world of oil.
it that we expect OPEC (and since Saudi Arabia is the only producer with the
substantial ability to ratchet up and down production, we really are talking
about Saudi Arabia) to cut output in order to help out American oil
producers? Saudi Arabia and its fellow OPEC producers have their own
interests, and if they believe producing at a certain level is prudent, it
is a bit curious to
argue that they are "declaring war on U.S. shale." But that is exactly
what happened last year when they decided to leave their production levels
Moreover, while cutting production would help to increase
prices, OPEC would lose out from selling less oil. It is not clear why OPEC
should, in effect, subsidize higher cost production from around the world.
Saudi Arabia tried to cut production in the 1980s to rescue prices from rock
bottom levels, but it only led to the loss of market share. It is no wonder
that the oil kingdom is not keen to go that route again.
leaving all of this aside, it is hard to even discern that such a "war" is
actually taking place. After all, OPEC has only slightly increased output
from 2014, and much of it came from Iraq, which has been trying to increase
production at all costs, regardless of OPEC decisions. Iraq is not subject
to the quota restrictions, and so it is pulling out all the stops to
The U.S. on the other hand, has aggressively
increased output. It is easy to see that much of the responsibility for the
crash in oil prices stems from a massive spending spree in the U.S. shale
increased output by around 4 million barrels per day between 2011 and
the peak in 2015, nearly doubling production from 5.6 million barrels per
day (mb/d) to 9.6 mb/d. OPEC's production, meanwhile, hasn't changed
dramatically over the same time period.
Larger Image URL:
In this light, why is it that OPEC's decision to leave its quota
unchanged in November 2014 elicited calls that the cartel was waging war?
Why is the world not calling on U.S. shale producers – which have a much
higher breakeven price – to get out of the business so that other oil
producers around the world can survive? In any other sector, high-cost
producers are forced out of the market. Nobody expects the stronger
producers to cede ground to weaker ones.
U.S. production is now
down by about 500,000 barrels per day since April. Oil prices will rise
over the next year or so as U.S. shale is forced to cut back. That
adjustment – high-cost suppliers forced out – is how markets are supposed to
Nevertheless, as OPEC heads to Vienna in six weeks' time,
there will undoubtedly be more headlines about OPEC continuing its war on
Share this article with your facebook friends