OPEC: Doing first things last

The Organisation of Petroleum Exporting Countries (OPEC) has shown the world that sometimes it pays to do first things last.  In 2008 when oil prices suddenly plummeted from an all-time high of $147 to $50 per barrel, production cut was the cartel’s first line of defence.  The move stabilized prices within six months and engendered a steep climb.  The organization had followed the dictates of the invisible hand of market forces of demand and supply on price mechanism.
In 2014 when a sudden lull in China’s economic growth and the debt contagion in the Euro zone forced down oil demand, conjured monumental supply glut and pushed down prices precipitously, OPEC’s price war tacticians responded with a voodoo economic strategy of boosting prices with supply glut.
Unlike the scenario in 2008, there were fears that with America’s shale oil producers and Russia, the world’s largest exporter of crude oil outside OPEC, a unilateral production cut by the cartel could amount to suicidal marketing strategy.

OPEC therefore opted to fight the supply glut by allowing tumbling oil prices to ease shale oil producers out of the market and push up prices.  The strategy was premised on the perception that production cost in shale oil fields is astronomical compared to developments in conventional oil fields.  It was therefore argued that when oil prices drop below $55 per barrel, shale oil producers would find it uneconomical to be in business. At that point, their natural exit from the market was expected to stem the supply glut and stabilize prices.
After two gruesome years of experimenting with the voodoo tactics, it has become clear to the price war tacticians in Saudi Arabia that no one fights tumbling prices with supply glut.  There was actually a drop in rig count in shale oil fields due to plummeting oil prices and high production costs. However, the casualty figure was too insignificant to stem the supply glut and shore up prices.
In September, 2016, OPEC price war tacticians finally decided to do the first thing last. The organization seriously discussed production cuts. Unlike in 2008, the price war experts knew that production cuts by OPEC would not check the global glut if Russia continued to hit the market with 11 million barrels of crude daily.
Russia was included in the discussions.  This time even the rich in the oil production club were willing to fight tumbling prices.

Saudi Arabia needs higher oil prices to fund the proxy war in Yemen. Russia’s economy is bleeding from crippling Western sanctions over the annexation of the Crimea.  Besides, the Kremlin needs revenue from higher oil prices to fight the war in Syria to keep Baashar Assad in power.
Iran, a leading member of OPEC, is just coming out of crippling Western sanctions over its Islamic nuclear bomb programme and sponsorship of global terror organizations. The ayatollahs running the Islamic model of theocracy in Teheran are bogged down in proxy war in Syria.  They need higher oil prices to execute their programmes.
With major producers grappling with liquidity squeeze, OPEC had little problem convincing both members and non-members of the oil cartel to adhere to production cuts in a desperate bid to shore up prices. When the plans were first announced in September, the effect on oil prices was instantaneous.  Prices immediately crossed the $50 mark before fears about OPEC’s ability to enforce the proposed production cuts brought it down to $43 in the middle of November.
On November, 30, OPEC thrilled the world with an agreement in Vienna, Austria, to cut production by 1.2 million barrels daily. The oil cartel effortlessly shared the production cuts among its members.
Saudi Arabia takes the lion’s share of 600,000 barrels per day.  That deal would reduce the cartel’s share of the oil export market to 32.5 million barrels daily. The Russians were expected to cut production by 600,000 barrels per day.  They however, grudgingly offered 300,000 barrels.
Nigeria and Libya were exempted from the production cuts due to their peculiar circumstances.  In the last one year, Nigeria has not met its production quota of 2.2 million barrels per day due to the militancy in the Niger Delta.

It might not benefit from OPEC’s production largesse if it fails to reach a political solution with the gunmen in Niger Delta.
Libya, on the other hand, is in a more precarious situation than Nigeria. Some of the country’s oil fields and export facilities are in the hands of terrorists.  Libya may not meet its production quota in the near future.
The deal by OPEC is expected to boost oil price to $60 per barrel. Within two days of the deal in Vienna, prices surged to $52.65.  However, there are no guarantees that it could climb to $60.  The deal requires Russia’s maximum cooperation and that of other non-OPEC producers.
The only fear is that oil price at $60 could spur production in America’s expensive shale oil fields, trigger a fresh supply glut and return prices to the calamitous days of February 2016.  However, with Russia’s economy bleeding profusely from low oil prices, the Kremlin might be compelled to stem fresh supply glut.

The deal by OPEC is expected to boost oil price to $60 per barrel. Within two days of the deal in Vienna, prices surged to $52.65