Next month will be the anniversary of OPEC’s historic decision to relinquish its swing producer role and allow its members to produce oil as much as they can. OPEC took such a decision based on its need to retain its market share intake in the light of the competition it faced from other expensive oil producers that are not members of OPEC.
Since then, oil prices crashed from $115 per barrel to less than $50 today while the global oil surplus has reached more than 3 million barrels. No one seems to be interested in cutting down their oil production while shale oil producers seem to be playing the role of swing producer as it is unable to sustain production at below $50 per barrel. However, shale oil is capable of bouncing back within a short period unlike the traditional oils.
Oil producing countries have lost more than 50 percent of their revenues and are continuing to lose more, due to which they are facing difficulties in managing their budgets and have to reduce expenditures and increase fuel prices to meet their needs. Majority of these countries have to borrow, liquidate their assets or take from their national reserves. Such a task is huge and difficult especially after they spent years of prosperity and surplus funds. They have to now face a new reality with some austerity in their expenditures.
Meanwhile, OPEC has still failed to estimate the breakeven cost for producing one barrel of shale oil; hence, the bleeding took almost the same period to determine the cost and still it can survive at a new low price level. Initially, it was estimated to be around $60-$70 per barrel, later $55 and now lesser than that. Shale oil producers can reduce costs quickly and more efficiently, and it could drop further in few years’ time. This is a matter of survival and time. Nevertheless, its decision is correct and has to be followed closely, while we have to be continue being austere in our expenditures, under the consideration that it will take few years for oil prices to bounce back to more than $60 per barrel.
In the meantime, investments and oil explorations must be reduced by more than 30 percent compared to last few years until the oil prices recover as a result of better economic activities and revival of economies of major players such as China, India and other emerging Asian countries.
Until then, OPEC will maintain its policy of free production rate in order to retain its market share. It will also be ready to accept any opportunity to share any future production cuts by non-OPEC oil producers. This is the only way oil prices can reach a reasonable level which will in turn encourage investments in new oil fields again.
One year has passed. Let us hope that things will be better by November 2016.
By Kamel Al-Harami
Independent Oil Analyst