OPEC Economics and International Markets
During the last several years, petroleum prices have dropped significantly due mainly to advanced exploration techniques, such as hydraulic fracking, and increased oil explorations throughout the world. Therefore, countries whose national budgets are highly dependent on petroleum prices, particularly the members of the Organization of Petroleum Exporting Countries (OPEC), have been working for months in order to reduce global oil supplies. Yesterday, November 30, the fourteen OPEC members met at the organization’s headquarters in Vienna, Austria to agree on significant oil production cuts that, they expect, will increase international oil prices. Countries, such as Venezuela and Saudi Arabia are hoping to increase their state revenues and relieve the stress on their national budgets, thus, easing domestic social tensions. The primary goals of this ambitious and momentous meeting was to agree on concrete production cutbacks that engage all OPEC members. Furthermore, the OPEC authorities sought out a binding agreement with non-OPEC oil producing nations, particularly Russia, in order to further the global impact of their joint decision.
Even though the OPEC did represent a majority of the world’s oil market several decades ago, their monopoly power has been severely diminished by producers such as Russia, China, the United States, and Canada. Thus, the OPEC’s decision to significantly reduce production and engage non-OPEC economies. Today, the OPEC as a whole represents less than half of the world’s petroleum supply. The risk of non-OPEC exporters gaining market terrain while OPEC members pull back on production is a real worry. Therefore, almost every OPEC member state and several non-OPEC nations have set out ambitious adjustment targets. This article explores the OPEC’s plan for 2017 and its repercussions on international markets.
OPEC Economics and International Markets
One of the significant announcements made yesterday by the OPEC authorities was that Indonesia is suspending (not withdrawing) its membership within the organization for the time being. The decision to suspend Indonesia’s OPEC membership is due to the fact that the exports from the Southeast Asian nation have diminished to the point that the country can no longer be considered a major petroleum exporter. Similarly, Indonesia is not in a position to contribute oil production cuts to the OPEC plan.
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Concretely, the OPEC members agreed on cutting production to 32.5 million barrels per day (bpd) for 2017, which entails a reduction of 1.2 million bpd. The largest adjustments will come from Saudi Arabia whose output will decrease by 486.000 bpd, Iraq that will cut back 210.000 bpd, and the United Arab Emirates (UAE) with a 139.000 bpd reduction. Interestingly, the OPEC members allowed Iran to augment its oil production next year by 90.000 bpd, which was the largest and most significant authorized increase. Another important announcement is that several non-OPEC nations have agreed to cut back production by a total of 600.000 bpd, particularly Russia with a 300.000 bpd reduction.
Yesterday, the reaction within the international commodity markets and the foreign exchange was immediate with crude oil prices increasing sharply to approximately US$50. If the OPEC agreement is properly enforced and implemented, it is expected, at least in the short and medium term, that the national currencies of oil producing countries will strengthen against the US dollar (USD).
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