OPEC is keeping a lid on oil supply. The cartel has agreed to maintain the output restriction imposed in January for another nine months, hoping it will soon balance the market and end the oil-supply glut.
You might wonder, from a crude Canadian perspective, if the clock is going back to the "good old days" of OPEC oil-price manipulation, but don't be led astray. The oil multinationals should do well next year, with good margins and cash flow. But even if OPEC's supply management strategy carries on for nine months (and there is talk of a further three months) and even if Russia remains aligned, crude oil will continue to be a buyer's market.
North America's shale oil producers took a big hit when the Saudis launched their campaign for market share back in 2014. Producers went bankrupt, oil rigs went idle and U.S. oil output dipped. However, over the past six months, U.S. output has surged by more than 500,000 barrels a day as tight-oil producers responded to the rising price. The International Energy Agency forecasts that U.S. crude output will be almost 800,000 b/d higher at the end of 2017 than in December last year. Wood Mackenzie, the oil consultancy, reckons that U.S. tight-oil producers will boost output by 950,000 b/d next year to more than 10 million b/d.
The speed at which U.S. oil producers responded to price stimulus is astonishing. Saudi Arabia is no longer able to manage the oil price by acting as a swing producer, opening or closing the spigot in response to the level of crude in storage. The swing producer is now the United States and the tight-oil explorers in Texas and the Dakotas who respond to prices, not estimates of oil in storage.
This change is devastating for the OPEC cartel, which, according to the U.S. Energy Information Administration (EIA), has lost two-thirds of its revenue as a result of Saudi Arabia's decision in 2014 to abandon price management and flood the world with oil in pursuit of market share. The loss of income is enormous.
According to figures published last week by the EIA, OPEC earned $433-billion in net oil revenues in 2016 compared to $1.2-trillion in 2012.
The dash for market share has been damaging for Saudi Arabia; its oil income has fallen from $350-billion in 2012 to $133-billion. It explains the belated campaign to open up the Saudi economy, its incredible ambition to end its addiction to oil and the privatization of Saudi Aramco. Even at the inflated valuation of $2-trillion touted by Aramco's promoters, the 5-per-cent stake on offer to investors will not do much to replace the accumulated loss of income over several years.
The financial pain suffered by Saudis is as nothing compared with the wrecking of the Libyan and Venezuelan economies. Both have endured a collapse in oil output alongside price attrition. Thanks to the nationalization of Venezuela's oil industry and continuing political chaos, the country's oil output is in steady decline, losing one million barrels a day since the late president Hugo Chavez was elected. According to the EIA figures, Venezuela's oil revenues have fallen over four years in real terms from $70-billion to $30-billion.
Worse still is Libya, where oil revenues have all but disappeared, falling from more than $40-billion a year to $3-billion since the Arab Spring transformed the North African country from rogue state under Moammar Gadhafi to failed state.
In private, the OPEC cartel leaders will be thankful that the oil output of Venezuela continues to shrink. It leaves more room to accommodate the reliable producers and the competing output ambitions of Iraq and Iran, which are pushing hard to steal Saudi Aramco's customers in China and India.
Yet, that may not be enough to stop renewed oil-price attrition. When the output agreement expires next year, it is likely that Russia, Iran and Iraq will rush to buy market share just as output soars in the United States. Knowing this, the rulers of the oil-producing states of the Arabian Gulf must look with horror at the ruin of Libya and wonder what their world will be like in a future where oil demand is approaching its peak before heading into gentle decline. The welfare states of OPEC, where energy is almost free to consumers, cannot be sustained at such weak oil prices. Nor will these countries, with their one-trick economies, be able to afford expensive imports of food and medicine, not mention the lifestyles of idle princes.
We are soon approaching another great economic reckoning that will put the OPEC member states under severe political stress. Peak demand for oil may bring with it yet more civil unrest, a huge social and political challenge for OPEC countries. And we, too, must prepare ourselves for the consequences, as the victims of the collapsing oil-producing economies head north and west to seek refuge in our towns and cities.
Carl Mortished is a Canadian financial journalist based in London
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