Thursday , October 19 2017

OPEC dilemma: Cut output or increase market share – ‘Doing nothing is best option at moment’

Kamal Al Harami
Kamal Al Harami

The challenge that every member of OPEC is facing now is whether to cut down oil production or increase market share. Both options have merits and benefits as well as short-term and long-term advantages.

Oil producers with huge reserves must have a long-term vision and need to capture as many sustainable markets and volumes as possible, while those with smaller volume want immediate cash and hope to manage in the future.

Because of the disarray among the OPEC members, agreeing on what action to take or reaching a consensus seems impossible. Prior to November 2014, reaching an agreement regarding reduction of oil production and quota distribution was manageable. Saudi Arabia, being the biggest oil producer among the OPEC members, made some sacrifices to manage the supply without much competition from the outside.

However, new expensive oil producers arrived in the market to grab the OPEC market share and compete fiercely. The choice became difficult and sacrifices became irreplaceable, as it meant losing the market share forever.

America’s shale oil, Canada’s sand oil and Brazil’s deep water oil emerged in the market as new suppliers despite being almost 5-6 times more expensive than conventional oil. The issue that OPEC is facing is that some of its members do not want to believe this aspect and is pushing Saudi Arabia to act like the way it did in the past 50 years.

Today, the challenge is from Russia, as its production is nearly 11 million barrels and it does not want to cooperate with OPEC. Its attitude is like ‘Let us suffer together but we will not cooperate. We have never cooperated before, so why should we now?’

Other expensive oil producers particularly shale oil producers are forced to reduce their volume but not low enough to balance the market in favor of OPEC. Therefore, the members of this oil organization must be patient for a while and work on their local economies by reducing their expenses and increasing the fuel and electricity prices to manage their budget deficits. It is a long process but once they start, it will benefit everyone. Reducing OPEC members’ oil expenses will certainly force expensive oil producers to suffer more and will throw them off the competition for a long time.

OPEC should consider long-term overview, as reduction of its production at this time may harm its market share for a long time. Today, everyone is equal in misery. Let’s see who blinks first. Therefore, doing nothing is the best option at the moment.

Email: naftikuwaiti@yahoo.com

By Kamel Al-Harami

Independent Oil Analyst

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