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About two weeks back, the OPEC (Organization of the Petroleum Exporting Countries) oil producers’ cartel decided not to cut output at its meeting in Vienna. Since then, oil prices have plummeted to a record five-year low. Saudi Arabia, the world’s largest oil exporter and OPEC’s most influential member could potentially support global oil prices by cutting back its own production, but so far there has been no sign of this. The primary reason is said to be to put the US’s flourishing shale oil and gas industry on the back foot.
OPEC is not in control.
For the second time in a week, OPEC officials intimated that the recent collapse in the price of oil is not related to OPEC’s actions or a fundamentally sound market. Speaking at an event in Dubai on Sunday, the secretary-general of the Organization of the Petroleum Exporting Countries, Abdullah al-Badri, said the price of oil had fallen further than market fundamentals would have dictated, reports Reuters.
“The fundamentals should not lead to this dramatic reduction (in price),” al-Badri said, according to Reuters.
Earlier this week, Saudi oil minister Ali Al-Naimi told Bloomberg, “Why should I cut production? You know what a market does for any commodity. It goes up and down and up and down.”
But as Business Insider’s Shane Ferro wrote last Wednesday: “The whole point of OPEC is to use collective action, through tightly controlling the world’s oil supply, to counteract the market forces that Al-Naimi is now saying should be allowed to move freely.”
All the oil politics aside, the oil consumers have been only too happy to save their oil dollars. While the drop may force many analysts back to their spreadsheets, the outlook for growth of solar (and other renewables as well) is still very much positive. However, global appetite for oil will grow at a slower pace in 2015 than earlier thought despite plunging prices, the International Energy Agency said Friday, warning of the risk of social instability in oil-producing countries such as Russia and Venezuela.
Oil demand for 2015 is now expected to grow by 0.9 million barrels a day to reach 93.3 million barrels, 230,000 barrels fewer than the previous forecast, it said in its fourth downward revision in five months. Crude prices have collapsed by more than 40 percent since June, and are now trading around $60 -- levels last seen five years ago, as increased US shale production adds to oversupply. But the cheap oil was not prompting more consumption.
OPEC had no target price for oil, Badri said in a reiteration of policy, and urged Gulf states to continue investing in exploration and production, saying the United States would continue to rely on Middle East crude for many years. Stopping new production projects would bring about a situation in which prices "will go back to $147 a barrel as in 2008. This was a result of a previous such situation," he said, recalling the potential market effect of a dearth in supply brought about by inadequate upstream investment.
Some commentators, including The Economist, have speculated that OPEC’s decision not to curb production amid tumbling oil prices was an effort to pressure US shale oil producers who have ramped up production significantly in the last few years.
In the first week of December, US weekly oil production came in at its highest level since 1986. On Friday, West Texas Intermediate crude oil settled at around $58 a barrel, while Brent crude oil was near $62, both five-year lows. According to Bloomberg, United Arab Emirates energy minister Suhail Al-Mazrouei said at the same conference in Dubai that, “We are not going to change our minds because the prices went to $60 or to $40 … the market will stabilize itself.” While oil cartel OPEC has previously acted against low prices by cutting output, this time round the group is sitting firmly against reducing supplies. Rather, it is in an all-out price war against US shale energy, in a battle to hold on to its market share. Industry players too have been forced to restructure and cut jobs, with petroleum giant BP Wednesday announcing an overhaul costing $1 billion.
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