OPEC states that wanted production cuts buckle under the new oil order
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But the plan is also producing casualties within the cartel itself: Angola, Nigeria and a Venezuela that’s on the verge of implosion.
Six months after OPEC left its high-production policy in place, some of the cartel members who called loudest for output cuts are feeling the most pain. Inflation is soaring and currencies have plummeted in lesser petro states, as top exporter Saudi Arabia continues to dictate policy.
While Riyadh tries to embark on a new path toward economic diversification under its influential deputy crown prince, those other OPEC states are seeing fragile gains slip away and threats to stability creep in.
For the moment, relief is elusive.
The Organization of the Petroleum Exporting Countries is not expected to cut production at its meeting Thursday. Nor is it likely that members will agree to freeze production, an idea that failed at an April meeting after the Saudis balked at capping output without participation from Iran.
“The other member nations of the OPEC cartel have had their hands out since November of 2014, saying, ‘Let’s have a meeting. Let’s stop this stuff,'” Loren Scott, president and founder of economic consulting firm Loren C. Scott & Associates, told CNBC’s “Power Lunch” on Tuesday.
“The problem here is these other countries do not have a big stash of cash over here like the Saudis,” he said.
Saudi Arabia and other Gulf states have ridden out the downturn in no small part due to the cushions afforded by their huge sovereign wealth funds and foreign reserves.
Meanwhile, Iran says its crude exports will soon reach 2.2 million barrels per day, as the country competes with rival Saudi Arabia for market share after an end to sanctions against Tehran. Iraq and Kuwait are also ramping up production this summer to capture a bigger piece of the pie.
OPEC members like Venezuela, Libya, Nigeria and Angola have called for production cuts essentially since the start of the oil price downturn in mid-2014. Now some of those countries have reached their tipping points.
To be sure, those countries already had problems of their own making. A wealth of research has shown that nations with abundant natural resources often fail to achieve economic growth because there is little incentive to develop non-energy industries. Commodity-dependent economies also tend to lack the institutions necessary to turn resource windfalls into equitable development, and corruption is often entrenched in these places.
In Venezuela, inflation has exploded by triple digits, making imports so expensive that people have resorted to looting. Electricity rationing has ironically cut energy producers’ access to power, compounding the oil problem with output declines.
Street protesters are calling for President Nicolas Maduro to step down, leading to confrontations with police. Maduro’s party does not hold a majority in the Venezuelan legislature, and friction between the two branches of government has led to a constitutional crisis.
A poll shows nearly 70 percent of people believe President Maduro must go.
James Lockhart Smith, head of financial sector risk at Verisk Maplecroft, said there is risk of severe political upheaval.
“You’re in a situation with a political regime that has never had to play by the rules of democracy when it’s been on the losing side,” he told CNBC’s “Closing Bell” last week. “It’s been very happy to be committed to elections and so forth when it’s enjoyed a majority, but it’s now in a very, very difficult situation and will not voluntarily hand over power.”
In Nigeria, where oil accounts for 90 percent of exports and 70 percent of government revenue, President Muhammadu Buhari’s administration kept the country’s currency pegged to the dollar. That checked the currency plunge that other oil producers have experienced, but it has also put the country’s trade in jeopardy as the central bank’s supply of greenbacks runs perilously low.
United Airlines announced last week it would cut air service to the Lagos because currency controls had made it difficult to collect money from Nigerian customers.
The budget was also delayed for months, leaving Nigeria’s 36 states without money to pay salaries. Now, Central Bank of Nigeria Governor Godwin Emefiele says recession is imminent.
That forecast came amid renewed attacks by militants on the country’s energy infrastructure after seven years of relative peace. Sabotage by a group calling itself the Niger Delta Avengers has reduced the country’s oil output by a third.
The group is determined to bring the government to economic paralysis, said Manji Cheto, senior vice president at Teneo Intelligence.
“It wants to dominate the sort of security environment, make the government really get to the point where they have to get to a negotiating table,” she told CNBC Europe’s “Street Signs.”
When even ‘meeting daily needs’ is hard
Things aren’t much better in Angola.
Amid turmoil in the Middle East and Africa in 2011, the Center for Strategic and International Studies identified three major risks for Angola: a downturn in crude prices, difficulty in delivering services to the nation’s urban poor, and a botched succession should President Jose Eduardo dos Santos step down after 37 years in office.
Today, the first scenario has come to pass, and the second is underway.
Infrastructure, housing, and access to water and electricity improved significantly for Angola’s city dwellers after the country emerged from a quarter century of civil war in 2002. But runaway inflation is inflaming lingering problems in this oil-dependent nation.
“Meeting daily needs has become much more difficult. Food has risen a lot. Transport costs have risen a lot. You see less cars on the road, and people are struggling to take semipublic transport because the prices are also increasing,” said Rebecca Engebretsen, a Ph.D. candidate at the University of Oxford who studies oil governance and petroleum revenue.
With the Angolan currency in free fall, Angolans are having a tougher time compensating for the country’s underinvestment in education and health care, Engebretsen said. It has become more expensive for Angolans to continue seeking medical care in South Africa and Brazil, and to send children to schools in Portugal and English-speaking countries, she added.
Even as oil prices rebound to around $50 a barrel, countries like Angola may continue to find themselves in turmoil. Some OPEC watchers believe the cartel is at a turning point that will see Saudi Arabia take a more hands-off approach to oil prices.
Saudi Deputy Crown Prince Mohammed bin Salman appears to believe that OPEC should less directly manage oil markets, according to Gary Ross, founder and executive chairman of Pira Energy, who spoke to CNBC last month after Saudi Arabia replaced its oil minister of 20 years.
That approach will have ramifications for all OPEC states.
“What it means is you’ll have much more market volatility,” he said.
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