Remember when OPEC was a cartel that attempted to stabilize oil prices by manipulating its production?
No longer.
Saudi Arabian Minister of Petroleum Ali Al-Naimi made a surprising statement at a UN climate-change meeting in Lima, Peru.
“Why should I cut production? You know what a market does for any commodity. It goes up and down and up and down,” Al-Naimi said according to Bloomberg.
This is interesting, as Al-Naimi is ostensibly the most powerful man in the cartel that has been manipulating the global oil market since 1960. The whole point of OPEC is to use collective action, through tightly controlling the world’s oil supply, to counteract the market forces that Al-Naimi is now saying should be allowed to move freely.
This comment came on the same day that OPEC lowered its demand expectations for next year to 28.9 million barrels a day, a cut of about 300,000 barrels. It’s the lowest the forecast has been since 2002.
OPEC gave two reasons: The first is increased production around the world (mostly coming from shale production in North America). The second is reduced demand. As technology is improving for oil extraction, it’s doing the same for energy efficiency.
In November, OPEC decided not to cut production despite these market forces, to the detriment of the economies of many of its poorer member countries like Venezuela, Ecuador, and Nigeria. The price of oil has been falling since June, when it was rougly $105 per barrel, with particularly steep drops in October and November. No one is sure exactly why the price slid so rapidly, but it’s now down to around $60 per barrel and doesn’t show any signs of recovering.
The price of oil hit new relative lows this morning. Here’s the chart for WTI crude:
This new stance by Al-Naimi is likely a political tactic. Saudi Arabia wants the price of oil to go low enough that American producers in the newly drilled shale basins aren’t making any money. Then they might stop flooding the market, giving Saudi Arabia back its position as the world oil leader.
Saudi Arabia’s tactics are working, too. The US Energy Information Administration (EIA) recently reduced its forecast for production growth in 2015 by 100,000 barrels a day.
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