Why OPEC is over and low oil prices are here to stay

The UAE's energy minister has ruled out any reduction in output and stated that oil prices will remain low for the foreseeable future.

by Andrew Saunders
Last Updated: 10 Feb 2015

Speaking in Abu Dhabi, Suhail bin Mohammed al-Mazrouei, energy minister for the UAE and a senior representative of OPEC's 12 member countries, has said that even record low oil prices will not change the cartel’s resolution not to cut output. ‘The strategy will not change,' he said. 'We are telling the market and other producers that they need to be rational.’

Rational or otherwise, the collapsing oil price has certainly put the cat amongst the pigeons all over the world. A great deal of excited speculation has resulted, most of it boiling down to the question ‘Is sub-$50 oil a Good Thing or a Bad Thing?’

Here in the UK that’s a moot point. For the North Sea oil industry it is clearly a bad thing, as even the most competitive oilfields there struggle at that price and many are in the red.

For the hard-pressed British consumer on the other hand (or at least the ones who don’t work in Aberdeen) it seems like a Good Thing. After five years of wage stagnation and rising prices, no one is going to bellyache about cheaper food in the shops or the fact that petrol is now 30p a litre less than it was a few short months ago. Deflation is on the way, and despite its impact on the public finances most seem to be relishing the prospect.

The other question that has been occupying economists al over the world is whether the price drop is due to oversupply or a fall in demand. This matters because oil is a key benchmark for global economic activity, so falling demand rather than simple oversupply could indicate a global slowdown. Not again.

You won’t be surprised to hear that a diverse range of expert opinion is available on this matter. Many oil industry types reckon that supply is the key factor - it’s certainly true that this is the first time in decades that the oil market has been free from very careful production controls under the watchful eyes of OPEC. No wonder the price is falling.

But it’s also true that the price of other key commodities is also on the slide - iron ore fell by 50% last year, and only this morning the copper price hit a five and a half year low after a big sell off in Shanghai. Maybe demand is on the wane, too.

Meanwhile, OPEC seems to be happily pursuing its own agenda, which here in the west has been widely interpreted as trying to put the upstart US shale oil industry out of business. But there may be a good deal more to it than that - the decision to end price controls was effectively taken by Saudi Arabia unilaterally and may have at least as much to do with Middle Eastern geopolitics as the economics of US oil.

Saudi has both the lowest production costs and highest reserve capacity in the world, and can thus easily outfight both global and local rivals in a price war. Its ruling Saud dynasty fear they are losing their historic grip on the region - hitting rivals where it hurts most might help them reestablish that powerbase.

But the consequence is the end of OPEC - Saudi and its allies such as the UAE can take $46 (£30) oil and not break a sweat, but for members like Venezuela it is a disaster. Its economy is predicated on getting $100 for every barrel of the black stuff. The upshot is that there is no longer a party line all can toe, so the cartel which dates back to 1960 looks to be on its last legs.

Not entirely coincidentally, the oil price is also very bad news for Russia, already struggling with a range of largely self-inflicted economic problems and looking increasingly politically dangerous in eastern Europe.

So the ultimate irony is that while the slump in the oil price may be bad for the US shale oil business, it’s come in pretty handy for the country’s foreign policy. And while the political interests of the world’s largest oil consumer and the world’s second largest oil producer are both thus aligned, it really does seem plausible that low oil prices could be here to stay.

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