Au Revoir, Adios, Auf Wiedersehen, Goodbye OPEC

OPEC faces serious challenges. Bank of America is quoted as saying that OPEC is “effectively dissolved”. And the author of the Telegraph posting “Saudi Arabia may go broke before the US oil industry buckles” reports “The cartel might as well shut down its offices in Vienna to save money.”

OPEC Cartel

Well, is the OPEC collapse imminent?   Probably not, but the major nation in OPEC, Saudi Arabia, appears to be in trouble and quoting from the Telegraph posting:

” It is too late for OPEC to stop the shale revolution. The cartel faces the prospect of surging US output whenever oil prices rise. If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier** states.

OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for “clean fracking” in China as plasma pulse technology cuts water needs.

Mr. Sheffield (Scott Sheffield, head of Pioneer Natural Resources) said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia’s giant Ghawar field, the biggest in the world.”

Saudi Arabia

“Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The ‘fiscal break-even price’ is $106.

Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.

Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.

Diplomatic spending is what underpins the Saudi sphere of influence in a Middle East suffering its own version of Europe’s Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.”

National budgets that are in trouble

Other countries facing budget shortfalls:

In addition to Saudi Arabia, other OPEC countries on this list that need a price above the $62 future price for December 2020 are Nigeria, Iran, Algeria and Venezuela.   We know that Venezuela is collapsing. Kuwait and Abu Dhabi are relatively close to the $62 price.

Some thoughts

The world does not have enough oil to supply an economic expansion without the oil from Saudi, etc.   Hence the price will have to rise to keep these countries afloat. The countries affected may have to make major adjustments to their internal budgets to survive. So for a while, the price will have to rise into the $100+/barrel range. This will certainly spur countries that have the potential to recover oil by fracking to do so. Could these new sources be enough supply to meet the demand with only limited supplies from the OPEC cartel?

I think this means that OPEC will probably never again be able to arbitrarily set a price for crude oil , as they have for many years.

cbdakota

** In political science and international relations theory, a rentier state is a state which derives all or a substantial portion of its national revenues from the rent of indigenous resources to external clients. Wiki definition