One of the prime culprits is that not all of the countries follow production quotas. This erodes OPEC’s internal cohesiveness and its external credibility.

Falling oil prices present an especially difficult scenario for OPEC. Many of its member states rely on petro income to survive, so are disincentivized against a production cut. This, of course, enrages larger producers like Saudi Arabia, which has to suffer fiscally from lower production without seeing the intended rise in price.

Previously, Saudi Arabia has pumped production to drive down the price of oil to as low as $10/barrel, effectively starving the more oil-dependent regimes of income. It proved to be effective, but will Saudi Arabia do the same this time? We consumers can only hope.

Bo-yun Liu

Bookmark It

Hide Sites

According to OPEC, the market is flooded with oil right now and demand is dropping faster than anticipated. This has led to a drop of over 60% in the price of oil since July.

Is OPEC’s concern for the oil market based on a desire to help the global financial situation, which Ghanem said was in shambles, or is it rather to increase profits for the member countries, many of whom rely on oil revenues to fund social works in their countries? Although OPEC may have the international economy’s interest at heart, when a cartel meets and determines to cut production, many see something different.

David Crowley

Bookmark It

Hide Sites

The collapse of oil price puts pressure on many of the OPEC countries, who depend on oil exports for revenue. Saudi Arabia, for instance, noted that $75 a barrel oil will insure continued investments in petroleum infrastructure projects. At the present level, investments have frozen and will likely threaten future supplies.

Venezuela and Iran, on the other hand, would like to see oil in the $90 range as they depend on oil revenue to prop-up domestically unpopular regimes.

In the upcoming meeting, OPEC will likely face one of the toughest challenges in the cartel’s history. On one hand, all countries could benefit from higher prices, but that necessarily means cutting production, which some countries may not be willing to do. In addition, current oil prices may help economic giants such as the US avoid a deep recession and in turn stimulate future demand. Should the cartel focus on short-term price goals or long-term demand?

Given the conflicting nature of the issue, the meeting in Algeria probably won’t be pretty. Who will Hugo Chavez call “facista” next? And how do you say “¿Porque no te callas?” in Arabic?

Bookmark It

Hide Sites

Crude oil prices are down 66% from a record $147.27 a barrel set on July 11^th, with slowing global demands leaving a 1 million barrel-a-day oversupply that needs to be removed by the end of the year.

OPEC is set to discuss compliance with a previous cut, on November 29^th in a meeting in Cairo. “We won’t have production data yet, but at least we can consult with each other. It does not mean we can’t take a decision,” Ghanem said. He also stated that they are “worried about the direction of prices” and that they “need to see if the oil price is falling because liquidity is leaving the market, or if there is too much oil in the market.” He concluded by mentioning that OPEC’s main goal is to stabilize the market.

UPDATED HERE

Roy Dickson

Bookmark It

Hide Sites

The continued decline in crude oil prices has led President Medvedev of Russia to pledge his country’s support for further production cuts. Aligning his policies with Iran and Venezuela within OPEC, he has called for  immediate cuts to stabilize prices   Even if Iran is unsuccessful this time, calls for more cuts will no doubt continue as President Ahmadinejad seeks reelection next year in the midst of 30% inflation, spurred by the fall in oil prices.

Bridget Russell

Bookmark It

Hide Sites

Holly MacGillivray

Bookmark It

Hide Sites

Saudi Arabia is the Gulf region’s largest economy. However, a significant portion of its GDP is accounted for by government spending.

The most conspicuous government projects can be found in Dubai, where, in just a few years a city comprised of mostly a single trip of tarmac turned into one of the most glorious display of modern sky scrapers.

Crude oil has retreated from a historical high of $150 a barrel in the past month or so to a more modest $100 range. Suffice to say that Saudi Arabia needn’t worry about a fiscal deficit just yet. In fact, in the most recent OPEC meeting, member countries were vocally divided on what the medium term equilibrium price should be for oil. Surprisingly, Saudi Arabia opined in support of a lower crude price than other member countries.

One would think that OPEC controls the nozzle of the world’s crude supply and has unchallenged power to reduce production to bolster prices. However, the economics of oil is not quite so simple. While recent hikes in crude prices are an often-cited reason for inflation in the US, inflationary effects are much more amplified in the Persian Gulf. Take Saudi Arabia, for example. Its currency is pegged to the greenback for price stability of its main export. However, it stymies the power of the Saudi central bank to employ monetary policies to curtail inflation. While the Fed has been lowering interest rates aggressively to spur growth, Saudi Arabia has suffered from pretty ugly inflation, which erodes wealth and could potentially have severe social political consequences.

The revelation in the IMF study is that the internal as well as external politics of OPEC are really quite complex. And the divergent break-even crude price adds further complication to an already diverse region of the world.

Bo-yun Liu

Bookmark It

Hide Sites

From an economic perspective, this means that supply will drop, but since demand will not change drastically, the price per barrel of oil will remain at or above $100 per barrel. As the chairman of Libya’s National Oil Corporation puts it, “Practically, it will lead to a reduction of production as the ceiling is less than the actual production. It will shore up the market and help stop the deterioration of the price.” OPEC’s president determined that the reduction will amount to approximately “0.6 percent of the world supply.”

As Reuters points out, the surprising part of OPEC’s decision was not the intention to reduce production, as was to be expected, but rather the fact that OPEC has made these changes public, not in the discrete fashion anticipated. One wonders if Libya’s disclosure of this information has anything to do with its increasing ties to the West.

David Crowley

Bookmark It

Hide Sites

The kingdom, which pumps one-third of OPEC production, is caught between the organization’s hawks pressing for deeper cuts to shore up falling prices and US-led Western consumers demanding more supplies, analysts said.

Following a marathon meeting on Tuesday, the oil producer cartel sprang a surprise by deciding to cut crude production by 520 000 barrels per day (bpd). The cut will not affect official output quotas of member countries, currently at 28.8 million bpd, but aims at taking extra production off the market. Most countries have been overproducing, Harami said, and to implement the decision all of them would have to reduce output.

Ahead of the meeting, Saudi Oil Minister Ali al-Nuaimi said the oil market was “fairly well balanced,” giving the impression that production levels would remain unchanged. Traditional price hawks Iran and Venezuela led calls for a production cut and were assisted by Algeria and Libya.

“Yes. The kingdom came under pressure … but the 520 000 bpd cut will not have a major impact on prices, because there is up to two million bpd of surplus crude on the market,” Saudi economist Ali al-Dakkak said.

Oil prices fell further on Thursday.

Brent North Sea crude for delivery in October dropped 56 cents to $98.41 a barrel.

New York’s main contract, light sweet crude for October, slid 51 cents to $102.07

Though those us living in the developed nation are well aware of OPEC’s impact on the oil market and our pocket books, few of us know about the internal politics of the cartel.

As far back as I can remember, OPEC has always spoken with a uniform voice. So this is an interesting development.

Will the forces of disagreement be strong enough to weaken the clout of the cartel? Despite the cut, oil is continuing its slide today.

Are traders going to pour over OPEC meeting transcripts looking for key words and phrases indicative of a potential cut or boost in production?

It will be an interesting development to watch.

Boyun Liu

Bookmark It

Hide Sites

Oil prices peaked over the summer and have steadily been declining, reaching a price of $103.26 a barrel in New York Tuesday, the lowest it has been since April.  This level of approximately $100 a barrel was a large point of interest to the OPEC meeting agenda.  An argument over the need to lower oil production to stop the price drop set Saudi Arabia against the group of Iran, Venezuela, Libya and Algeria, who are supporting keeping the prices above the $100 a barrel mark.

Saudi Arabia, pushing for stability projected at $80 a barrel, simply believes that prices are too high and that a steady equilibrium can be maintained at a lower level.  The opposing side, backed mainly by Venezuela and Iran, is pushing for a balance to be kept above $100 a barrel, providing both countries with more economic stability in the oil industry.

While Saudi Arabia contested the cut in oil production, the decision was finally agreed late in the evening.  It is expected that Saudi Arabia will slowly cut their oil production, but they will most likely not meet the expectations of the OPEC agreement.

Holly MacGillivray

Bookmark It

Hide Sites