To Cut or Not to Cut? No Dilemma for OPEC!

This is not a trillion-dollar question as OPEC is Almost Certain to Go With Status Quo!

OPECI do not think OPEC (Organization of Petroleum Exporting Countries) is in any kind of dilemma as they prepare to meet today in Vienna to decide whether or not they can keep the daily production capped at 30 million barrels per day.

Any reduction in production will inevitably lead to a fall in market share for OPEC, with non-OPEC members (Russia and the U.S.) benefiting from it, and push oil prices up.

Expanding Economy: That is neither in the interest of OPEC nor will it bring any cheer for consumers. To take a layman point of view that is aligned with common sense, such a move will benefit only those profiting from higher oil prices.

Al-Kakara-oil-field-uae-e1331636136216In an expanding economy, demand for crude will only surge. So any talk of a cut in production is ill-conceived and aimed at profiteering.

A few years ago when oil prices were soaring, OPEC had resisted demands to raise production to neutralise it. So why will they change course now? It did, though, trim production marginally once when oil prices fell from around $147 to around $100.

OPEC meetings are half-yearly affairs when they take stock of ground realities and take decisions based on what serves them best.

Recessions always preceded by price spike, not decline: As I had pointed out in my blog last December, historically, all recent recessions were preceded by a sharp spike in oil and commodity prices (and not a fall). So IMF chief Christine Lagarde was right in thinking that the fall in oil prices was indeed good news for the global economy.

oil-well-art-d0e8499fbec07478The last OPEC meeting was held in November 2014 when crude price was a tad lower than $80. As the price had taken a big hit, having declined from $125 or thereabouts, there were expectations that OPEC will cut production.

There was a superfluity in opinion then that if the fall in oil prices is not halted it would leave a trail of destruction on the global economy. I thought a crash, at its worst, can throw some businesses, particularly shale producers, out of business. Theirs is an expensive production model called “fracking” (horizontal drilling and hydraulic fracturing) which served the U.S. well.

1973 oil embargo and shale revolution: If we hark back to the 1973 oil embargo when the Arab countries banned crude exports to the US and other advanced economies over their support to Israel amid the raging Palestinian issue, we will see the beginning of the shale revolution.

oilmoneyThe US was already a big oil producer though nowhere near self-sufficiency. The ban lasted just about a year, but an acceleration in domestic production was already under way.

black-goldFurther Falls: Crude prices have fallen further, from $80 last November to around $60 now and those who predicted doom for the economy will now have realized how way off the tangent they were.

The prices are 50% lower than where they were last June and the global economy has not hit the dumps. If anything, should OPEC decide to bring down production, that will affect the economy.

India, a big guzzler, will particularly be among countries that will be hit if oil prices start going up. The new government there has not been able to take advantage of the oil slump to prop up its economy in any meaningful way though it has helped keep inflation under check.

G Joslin Vethakumar


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