Will OPEC Cut Production to Prevent Producer Deficits?

Since July, oil prices haven fallen approximately 50 percent. For many people, the drop in oil is a welcome relief but for oil producers, the price of crude has reached levels that could turn budget surpluses into deficits.

According to a report released by the IMF Monday on the Economic Outlook for the Middle East and Central Asia, the following are the break even levels on spending for oil exporting countries. If oil is less these price levels, the respective country’s income could fall short of its spending.

Iran = $90
Bahrain = $75
Oman = $77
Iraq = $111

Given that the current price of oil is well below most of these levels, a production cut by OPEC is very likely. The Wall Street Journal had a fantastic graphic Tuesday that outlines the changes to OPEC’s quota and the rolling 6 month change in the price of oil.

As you can see, whenever there is a large drop in oil prices in excess of 20 percent, OPEC sweeps in to cut production, triggering a bottom in oil prices shortly thereafter.

Source: Wall Street Journal

For the currency market, a bottom in oil prices could mean relief for the EUR/USD and the Canadian dollar.

Comments

[CLH:]

OPEC does not really exist. It has no way of inforcing its cuts. Instead as the price goes down and the different countrys need more money, they pump more oil to replace the losses from the lowered price.

If one company has a monopoly it can control prices. There is no way many countrys can control prices.

2008 Oct 21 08:06 PM

[bearfund:]

CLH, we all know you have no appetite for anything other than the US dollar, but really, claiming that cartels can't work? This is really Econ 101 material... cartels can't work in a free market but the presence of a cartel by definition precludes a free market. It's open for debate how well OPEC has resisted the temptation to cheat that is inevitable when cartels are on the scene, but I'd say history disagrees with your assertion of its impotence.

2008 Oct 22 12:13 AM

[User 283564:]

I love it, I hope the oil companies take the biggest loss ever. Perhaps maybe they'll learn not to get so greedy next time. All it has done is cause a spike in alternative energy research and a decreased in oil demand.

2008 Oct 22 05:49 AM

[Ferdinand E...:]

Interesting. When I was submitting my new energy economics textbook to the publisher a couple of years ago, the OPEC countries were wondering if they would ever see oil at $28/b, which was the upper level of their 'desirable' range. They never thought for a second that they would see the price it eventually reached, but now that it has, they want to see it again. What action they will take to bring this about is uncertain at the present time however.

The oil companies (i.e. Big Oil) were also thinking in terms of oil in the low twenties, because certain people with access to the media were telling them that the price would dip under $20/b.

Conclusion: with the oil price still well out of the twenties, you can stop worrying about OPEC and the oil companies taking losses. They prefer the oil price somewhere above $100/b, but they can't have that for a while, and I doubt whether knowledge of this fact is causing them to lose much sleep. Insofar as any debts that OPEC may have accumulated, that is a problem for the institutions that provided them with loans, although one thing is clear: when the oil price starts up again, every big bank in the world will be glad to provide them with money..

2008 Oct 22 10:10 AM

[Timothy Stolz:]

Since OPEC has the reputation of not being able to provide a cohesive unified approach to enforcing production quotas, I am going to guess that this time, at this Fridays meeting, something will be different.
Money, and quite a bit of it, is on the table this time around, and I believe the focus will be greed. The taste of "$147" per barrel oil was simply too good of a flavor not to try out the other flavors, like "$100" or "$85" or the soon to be favorite flavor of the western world at "$74.95."
OPEC is going to want to make a unified base price that is a measurement by which all of the worlds oil is priced. They have the oil....they have the power to set the price. They also have the power to enforce their own rules.
We shall see what Fridays OPEC meeting brings.

2008 Oct 22 08:21 PM

[NOWHEREMAN:]

How are you doing Fred?

Opec has no control at all once worldwide demand exceeds a certain level say 88 mil brls per day as an example. They would all be pumping at capacity except for say Saudi Arabia which might be able to tap another 1 mil. Brls.

On the way down however, Countries like Iran, Russia($70), Venezuela(90), and others can curtail output by a mere 15% to quickly drive oil back above $100. A 50% gain on a reduction of 15% seems to be a gimme to me.

The West loves low priced oil, but what this brings with it is deflation. The Mortgage Meltdown wasn't triggered by high oil. The financial crisis wasn't triggered by high oil.

However the meltdown in commodities is being exacerbated by low oil. The deflationary scenario now present for the Developed World is due to low oil and lowered expectations for prices for every commodity because of it.

Stimulus packages all over the world are being proposed to stop the Deflationary Spiral. Energy is the life blood of growing economies. If its use declines, regardless of price, those economies have stopped growing.

2008 Oct 23 01:17 AM