SHAFAQNA – An international oil and energy consultant and analyst believes that plummeting oil prices will lead all OPEC members to fill the gap in their budgets by utilizing their healthy reserves or by loans from international banks which cannot last for long.
In an interview to Mehr News, an international oil and energy consultant Manouchehr Takin gives his views on recent oil price falls, calling it a serious challenge for all OPEC members, even for the so-called ‘rich’ countries within the Organization.
Mr. Takin believes that US is both a winner and a loser in the current status. “It is a net importer of oil, thus its current account deficit is improving; however, its oil industry is under stress as companies are reducing their investments, making their staff redundant and some could go bankrupt and recession is becoming a serious problem in the oil states of the US.”
He sees the plummeting prices a factor to force the American leadership to become diplomatically more active and negotiate with OPEC and other producers.
Here is the text of interview:
What’s your assessment of the reason or reasons behind sharp fall in oil prices?
The major cause of the collapse in the price of oil is that supply is more than demand. The increase in supply has been due to the application of new technologies to exploration and field development operations around the world. The impressive increase of oil from shale and tight rocks in the United States is one example. US oil production had been declining since 1970 but it has increased by nearly four million barrels per day in recent years.
Another equally important reason for the oil supply increase is the high price of oil itself. One should remember that the price of oil had been fluctuating within the $20 per barrel to $30 per barrel range for many decades until it rose in the mid-2000s and reached nearly $150 per barrel in July 2008. The reason for that price rise requires a separate analysis. However, that five-fold price increase provided the world oil industry with huge revenues and strong cash flow that allowed them to expand their field operations all over the world and it resulted in the growth of supplies and the current market status. These included high-cost areas that were not economically feasible under the $20-30 price regime. The high cash flow also allowed the industry to develop and apply innovative technologies to their operations. The US shale oil is only one example.
However, the trigger for the recent price fall was the OPEC decision not to cut its own production for balancing the world market. As explained by some OPEC ministers, the Organization does not want to continue losing market share, maintain a high price and help its competitors. OPEC strategy is that the oil price collapse will force the high-cost producers out of the market and the Organization will benefit in the medium and the long term. Some observers have described the OPEC policy as a ‘price war’.
Some discuss that US and Saudis have agreed to reduce oil prices to damage Iran and Russian economies. What’s your view on such comments?
I am not a political scientist to comment on the geopolitical aspects and whether OPEC policy was really designed by the US and the Saudis to damage Iran and Russia. This could be a consequence of the price fall, but even if it were a consideration, it was not the main reason for the OPEC policy. The stated goal of OPEC policy is to force the high-cost producers, including US shale oil producers out of the global market.
It is useful to give some comments on the position of Saudi Arabia and why it is a key player in OPEC decision-making process. The country has been producing about 8-9 mbpd – a significant portion of the 30 mbpd total production by OPEC. More importantly Saudi Arabia has the largest oil production capacity (about 12 mbpd) of which about three million barrels per day is kept as spare and could be brought into production if required. Only Kuwait and the United Arab Emirates have small spare capacities. Almost all other member countries of OPEC have no spare capacity. They have been producing at their maximum possible rates, though these could be below their theoretical production quotas due to technical problems, imposed sanctions or lack of security. Being the largest producer within OPEC and having the flexibility to reduce or increase its production give Saudi Arabia a strong bargaining position within OPEC and make it a key player in OPEC decision-making process.
However, judging by similar oil crises in the past, it is quite likely that the fall in the price of oil would finally require negotiations by the heads of state and the political leaders of OPEC countries. In that case, a Tehran-Riyadh dialogue on oil could actually lead to a dialogue on political issues and improvements in the relations between the two countries.
The current prices would damage most of or even all of OPEC members; how do you see the reaction of OPEC members in short term and long term could be?
OPEC could benefit later when some competitors are forced out of the market, the reduced oil industry investments result in lower supply of oil, the price goes up and OPEC will face less competition. Until then, however, all member countries of OPEC will suffer financially and will face difficulties meeting their budgetary requirements. The annual budgets of OPEC member countries had been prepared based on high oil prices, all are facing revenue shortages and have to revise their expenditure plans and try to manage with half of their planned oil revenues.
It should be emphasized that OPEC countries are now even more dependent on oil than before the oil price rise about ten years ago. They increased their expenditure in line with the (five-fold) increase in the price of oil and some even expanded their generous domestic welfare commitments following the so-called Arab Spring and a fear of growing internal opposition. A fifty percent reduction of oil revenues is a serious challenge for all OPEC, even for the so-called ‘rich’ countries within the Organization. The latter could fill the gap in their budgets by utilizing their healthy reserves or by loans from international banks. This option, however, cannot continue for long.
Who is most benefiting from low oil prices? And who would benefit from a likely row between Iran and Saudi Arabia the most?
The net oil-importing countries will benefit most from the fall in the price of oil. They include the developing countries in Asia, Africa and Latin America, as well as Japan and most European countries. The most obvious benefits are that their trade balance will improve and their economies will benefit from cheap energy.
However, in the short-term, there will be some adverse effects from the oil price fall. For example, the 50% reduction in the revenues of oil exporting countries will force them to cut their imports, resulting in a significant fall in international trade and in the recycling of petrodollars. The OPECD countries will suffer from a major fall in their exports that will worsen their trade balance. Some developing countries will also lose huge repatriation funds as oil exporters cancel projects and lay off foreign labour and personnel. The global banking system will also be badly affected as many will be left with a burden of huge non-performing loans that they had extended to the oil industry around the world based on the price of oil being above $100/bbl. In the world stock markets the share prices of many banks have already fallen, as well as the share prices of many oil companies, service companies, their supply chain and others in the oil sector.
The last important point that should be brought to the attention of the readers is the position of the United States. The US is both a winner and a loser. It is a net importer of oil, thus its current account deficit is improving. However, its oil industry is under stress as companies are reducing their investments, making their staff redundant and some could go bankrupt and recession is becoming a serious problem in the oil states of the US. These will force the American leadership to become diplomatically more active and negotiate with OPEC and other producers. Indeed there is historical precedence for this. In 1986 Vice President George Bush visited Saudi Arabia and met the king and in 1998-99 Energy Secretary Bill Richardson openly lobbied OPEC and had meetings with many oil ministers.
Manouchehr Takin is an international oil and energy consultant who worked with the Centre for Global Energy Studies in London from its establishment in 1990 until the Centre closed in May 2014. He had previously worked for nine years at OPEC Secretariat in Vienna following a career in oil and mining industry operations with Iran’s International Oil Consortium, Amoco, Ultramar, National Iranian Oil Company, Shell, as well as the Geological Survey of Iran and Anglo American mining company.