Saudi Arabia Just Shattered OPEC, Won’t Reduce Oil Production

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Andrew Follett Energy and Science Reporter
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Saudi Arabia’s oil minister announced Tuesday the country will not reduce oil production, escalating a conflict inside the Organization of Petroleum Exporting Countries (OPEC) over current ultra-low petroleum prices.

“There is no sense wasting our time seeking production cuts,” Ali bin Ibrahim al-Naimi, Saudi Arabia’s petroleum minister, told energy executives at a conference. “That will not happen.”

The Saudi statement effectively ensures the price of oil will remain low, despite an agreement last week among major oil producers to freeze oil production so prices could increase. Oil prices have fallen more than 70 percent from a peak of $105 a barrel in June 2014, to the current $30 a barrel.

Most of OPEC and Russia want to increase the global price of oil through production cuts to prop up their faltering finances, while Saudis want to keep prices low to punish their political rivals and gain market share.

Starting in August, Saudi Arabia has prevented several planned emergency meetings of OPEC to discuss production cuts to boost the price of oil, which other OPEC members have repeatedly asked for and desperately need. OPEC members and Russia have been increasing the amount of oil produced since late 2014 for political reasons and to gain market-share. This, when combined with new American sources of oil, has led to incredibly low oil prices and the escalation of an enormous internal feud between OPEC members.

“The widespread perception that OPEC has been operating a coalition in the last 30 years is incorrect,” Omar Al-Ubaydli, a senior affiliated research fellow with the George Mason University Mercatus Center, told The Daily Caller News Foundation. “OPEC countries have been violating their quotas and basically mimicking the production levels of non-OPEC countries ever since the 1970s, and it’s just a strange configuration of incentives that keeps fueling the false perception of the OPEC monolith.”

Al-Ubaydli points out OPEC has always been substantially more fragile and less interested in global politics than it appears to Americans.

“OPEC’s members are locked in a geo-strategic battle that has nothing to do with oil,” said Al-Ubaydli. “For example, how on earth are Saudi Arabia and Iran going to coordinate oil output if they don’t even have diplomatic relations?”

The rise of the United States as a major producer and future exporter of oil completely alters the oil market in a way that isn’t good for OPEC. America surpassed Russia’s production of oil last year, and is now the world’s largest and fastest-growing producer of oil and natural gas. This is almost entirely due to the dual innovations of hydraulic fracturing, or fracking, and horizontal drilling which have made drilling for shale oil economical.

“[S]hale oil means that even if they did coordinate, demand for OPEC oil is more sensitive to price than in the past, because when the price of oil rises, shale oil producers quickly come online and steal OPEC market share…shale oil places an effective price ceiling that won’t be relaxed any time soon. While I expect oil prices to return to around $50-$60 a barrel in the coming 18 months, they won’t rise much more than that.”

OPEC member-state Venezuela has already been forced by its failing economies to accept its first shipment of American crude oil earlier this month, despite having some of the world’s largest petroleum reserves.

Venezuelan officials have repeatedly asked the Saudis to help “stabilize the international oil market” to restore high oil prices, but Saudis have continually ensured that “nothing really happened.”

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