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Cheap Oil May Trigger A New Era Of OPEC Dominance, Warns IEA

News Article by 5ELEM

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Lower oil prices for longer could result in a new epoch of dominance for the Organization of the Petroleum Exporting Countries.

That could increase risks that non- OPEC countries again will become dependent on oil from the volatile region, according to comments on Tuesday from officials at the International Energy Agency.

Speaking at the International Petroleum week in London, Keisuke Sadamori, director of the IEA ’s energy markets and security division, warned that if oil prices remain at current lows, reliance on Middle Eastern oil could return to a 1970s scenario.

In the early 1970s, OPEC production accounted for more than 50% of global output, making countries outside the cartel heavily dependent on the organization. This had severe consequences for the U.S. in 1973 when Arab members of OPEC imposed an oil embargo against the country as a response to the American decision to support the Israeli military and its involvement in the Yom Kippur War. The embargo led to a sharp jump in oil prices outside of the Middle East and strained a U.S. economy that struggled due to its reliance on OPEC oil.

“All oil producers have been negatively affected [by the slump in oil prices], but at the end of the day, there will only be the Middle Eastern producers, which have a very low marginally cost, to dominate the market [if prices stay low],” he said.

According to the IEA, OPEC production could jump back above 50% of global output by the 2030s if the sluggish oil-price environment allows the cartel to pursue its strategy of grabbing more market share.

“When we consider the geopolitical instability in the region and what we could continue to see in coming years, we don’t consider this to be a comfortable scenario,” Sadamori added.

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The 1970s case is part of the IEA ’s “low oil price scenario” laid out in the World Energy Outlook for 2015 published in November. In that scenario, oil prices would stay around $50 a barrel until the end of the decade before rebounding to $85 a barrel by 2040. This would come after a period of low growth in the global economy, a lasting switch in OPEC’s strategy to secure a higher share of the oil market and resilient non- OPEC supply, notably from U.S. shale oil.

Fast forward to February, and all three factors seem to be unfolding, with prices crashing to a more-than-decade low as a consequence.

“The fundamental story is that if we continue to have a long period of low oil prices then it’s not only the U.S. light, tight oil, but also various conventional resources like deep water oil and production from non- OPEC regions [that will be impacted],” Sadamori said at the conference on Tuesday.

In theory, Middle East countries can withstand for lower prices because they have low production costs compared with other oil producers, such as the U.S., where shaleoil extraction is among priciest in the world. Some estimate that nations like Saudi Arabia, Kuwait, Iraq and Iran can cope with prices around $30-50 a barrel for longer than their peers, making them more resilient, albeit not immune, to the current price slump.

According to the IEA ’s monthly report released on Tuesday, OPEC production is currently showing no signs of waning, with crudeoil output rising by 280,000 barrels a day in January to 32.63 million barrels a day. The boost was mainly driven by a sanctions-free Iran, whose output rose by 80,000 barrels a day in January to 2.99 million barrels a day.

Oil prices slumped after the report, with Brent oil settling almost 8% lower and crude oil sinking 5.9%. Prices rebounded a bit on Wednesday with crude oil climbing back above $28 a barrel.

Sadamori noted, however, that such low levels should in itself help fuel demand and bring the market more into balance in the longer term, likely preventing a repeat of the 1970s.

“This ‘low oil price scenario’ is hard to sustain in the long term, but if it does happen, we’ll see that the supply and exports will shift more to the OPEC side instead of non- OPEC,” he said.


 

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