The Saudis, the largest oil producers within Organisation of Petroleum Exporting Countries (Opec), and Gulf states won the case for leaving output unchanged which, given the decline in international demand attributed to lower growth in Eurozone and China, would imply lower prices and consequently lower export earnings for Opec members. The question is, why did the Saudis as well as the Gulf states opt to voluntarily reduce their export earnings when some of the original member countries, particularly Venezuela and Iran, had supported a reduction in output, which would have led to a rise in its international price?
The five original Opec member countries are Saudi Arabia, Iran, Kuwait, Venezuela and Iraq and seven additional members that currently maintain their Opec membership are Qatar, Libya, the UAE, Algeria, Nigeria, Angola and Ecuador. Opec countries share of crude oil reserves in 2013 was around 81 percent of the world total as per its website and 66 percent of these reserves are in the Middle East.
Saudi Arabia as well as the UAE and other Middle Eastern countries that supported the Saudi case in the Opec meeting have sufficient foreign exchange reserves to withstand the loss of export earnings in contrast to Iran and Venezuela. The booming Middle Eastern real estate market is another indication that loss of export earnings can be borne by these countries for some time. In addition, Saudis and other Middle Eastern countries also have a cost advantage through what the Opec site claims is adopting best practices in industry, realising intensive explorations and enhancing recoveries. This is evident from the following data: Venezuela, a founding member, has 24.7 percent of proven crude oil reserves (while Saudi Arabia has 22 percent) with Iran registering 12 percent. However, Saudi Arabia’s production was 9,605 Tb/d in September 2014 (with an average above 9,000 Tb/d every month), the UAE registered 2,812 Tb/d, Venezuela 2,332 Tb/d and Iran 2,765 Tb/d in September 2014, which explains why the Saudis were successful in playing the lead role in convincing other Middle Eastern countries not to cut production at this time.
Venezuela and Iran in particular, given their current economic concerns, reportedly vociferously argued in favour of cutting production in an attempt to ensure that their export earnings did not register a decline. The Venezuelan Foreign Minister left the Opec meeting visibly angered and no doubt the Iranian representative was similarly miffed.
Another reason for the rationale behind Saudi Arabia and other Middle Eastern countries support for keeping production unchanged was the fear that if Opec does slash its production it may not lead to a rise in international prices but merely a loss of their market share. This view is a reflection of the realisation that with the anticipated entry of the United States as a major producer of shale oil, the Opec market share would decline because of lower imports of oil by the US. Any attempt to cut production now to sustain international oil prices would simply enhance the profitability of US shale oil extraction, thereby fuelling extraction activity. This would negatively impact on international oil prices irrespective of the Venezuelan Foreign Minister’s accusation that the US is producing shale oil in “a very bad manner [which is] a disaster from the point of view of environment and climate change”.
Be that as it may, Saudi Arabia met with non-Opec members including Russia and Mexico to discuss the issue prior to the Opec meeting and the three oil exporting countries agreed to monitor prices for a year though there was no agreement on an output cut. It is patently clear that increasing production of shale oil and gas has served as a game changer in the world of fossil fuels. Opec is no longer in a position to manage the market that dictates the terms now. International prices are firmly headed south for sometime at least.
Be that as it may, reduced price of oil would have a major positive impact on the Pakistan government’s political fortunes with the Prime Minister’s office announcing that lower international oil prices would be passed on to consumers through reduced pump prices as well as lower electricity tariffs. The prime minister announced another major cut in POL products’ prices yesterday with a view to countering the Imran Khan’s November 30 challenge in an effective and meaningful manner.