All Eyes on OPEC Meeting

The 12 members of the Organization of the Petroleum Exporting Countries (OPEC), formed in 1960, and non-members, such as Russia, Brazil, and Kazakhstan, all had a major incentive to reach an agreement to reduce oil output and stop what has been a major collapse in crude oil prices since 2014. Compared to the $753 billion in revenue from exports then, revenue is expected to be $341 billion in 2016. OPEC members, Iran and Iraq, have been reluctant to cut production, with Iran also engaged in tit for tat charges with Saudi Arabia (See the earlier post, "Mixed Messages from Saudi Arabia.")

      At OPEC's November 30, 2016 meeting, members agreed to cut daily oil production by 1.2 million barrels beginning on January 1, 2017. Iran is allowed to increase its production to 3.8 million barrels a day as it recovers from sanctions imposed to block its nuclear program. Non-OPEC members are expected to cut 600,000 barrels a day from their production, with Russia accounting for half of the 600,000 barrel reduction. Large producers, Saudi Arabia, Kuwait, and the UAE, have a good record of compliance; compliance by other revenue-starved OPEC members will be closely monitored.

    The production cuts are designed to increase the price of a barrel of crude from under $50 to at least the range of $55 to $60, a welcome boost for oil-dependent economies in countries such as Angola, Venezuela, Nigeria, and Russia. Oil was selling in the low $50s in February, fell below $50 in early March, 2017, and rebounded in early April, 2017 to $52 a barrel. At the beginning of May, 2017, oil again had dropped to $45.5 a barrel and by June, 26-27. 2017, it was at the $43-$44 level.

     Nigeria provides an example of the devastating effect falling oil prices have had on an OPEC member. Banks are in trouble because of failing loans for investments in new local oil producers. Generating electricity is more costly. Currency controls have been imposed to limit the amount of foreign currency available to purchase imports and to foster local manufacturing; and the government has implemented a number of unsuccessful reforms to encourage unemployed urban residents to return to the farm (See the earlier post, "Nigeria's New Beginning.").

     Even with the OPEC agreement, it is feared oversupply will continue to dampen oil prices. US producers are in a position to increase output when prices rise and to shut down when oil is selling in the mid-$40 a barrel range or below. With higher prices, of course, more US shale oil production is also profitable.