OPEC stumbles

Posted on June 19, 2011

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Can the cartel walk the fine line between price and supply?

Hydrocarbon heavyweight Saudi Arabia flew in the face of opposition at last week’s meeting of the Organization of Petroleum Exporting Countries when it said it would unilaterally increase production to keep prices under control. Seven of the 12 OPEC members were opposed to any increase in production quotas. The question is: how much of the opposition is due to the higher breakeven prices facing most of the Arabian Gulf’s hydrocarbon economies? Saudi Arabia has budgeted about USD82 per barrel as its own breakeven price, about midway between USD103 per barrel in Bahrain and USD45 in Qatar.

One of the factors that has driven the breakeven price higher for some nations is the increased investment in social stability that they have made and will make. Which also renders them more sensitive to oil price movements. Any significant decrease in the price of a barrel — such as the one brought about by Saudi Arabia’s announcement of a unilateral production increase — would leave economies like Bahrain gasping for breath.

Producers have become used to higher revenues from oil and gas sales as prices fluctuate at higher levels, and they would be loath to do anything, such as increase production, that may upset this situation. On the other hand, consistently high oil prices have the potential to derail the global economic recovery, which would in turn cause demand to drop, taking the prices south. Decreased hydrocarbon revenues also have the potential to put on hold any exploration plans that might add to available reserves. It’s a fine balance. Does OPEC have the wherewithal to maintain it? Has it become a divided and ultimately redundant entity? Or has this past week’s decision — or rather the absence of one — been merely a stumble?

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Posted in: Commodities