The Impact of Crude Oil Price Fall on OPEC countries



Abhinav Chawla
11/06/2015

Impact of Crude Oil price fall on OPEC countries:

Brent Crude Oil price fall in Last 1 Year (http://www.bloomberg.com)

It’s been more than a year since we have seen the fall in Oil price, from the high of more than 100 $ / barrel to the present near 45 $ / barrel. With the price of Oil being at the lowest it is important to know the causes of the fall in price. The well documented cause is the huge production and oversupply from the Gulf and U.S., combined with a drop in global demand (major importers: China and Europe). This falling of price would benefit the oil importing countries like Japan, China or India; however the oil producing / exporting countries of OPEC would lose.

Initial reaction of the OPEC countries to falling Oil price:

As mentioned, fall in Oil price is mainly attributed to the increase in production from U.S. Oil shale and huge productions from the Gulf. At this time, many of the poorer OPEC member states, such as Venezuela, Iran and Algeria, had appealed for production cuts but the initial reaction from the OPEC was not to cut its production. In spite of a troubled economy in member countries, OPEC worked on a strategy, trying to slow down the production from the U.S. For the same the OPEC let the Brent Oil price fall around 60 $ / barrel.

The Scotiabank Equity Research and Scotiabank Economics report published November 2014 compares the cost of cumulative crude oil production in the fall of 2014, in Saudi, U.S. and Canada. Table below from the research shows that, fall in price around 60 $ / barrel would however not harm the Gulf countries but would certainly impact the poor economy OPEC member states and other countries whose economies were being stabilized by producing crude at higher prices.

Read More: Oil Price: The Top 25 Events That Rocked The Cost Of Crude Oil

Place

Cost of production in northern hemisphere autumn 2014

Saudi Arabia

US$10–25 per barrel

Montney Oil Alberta and British Columbia

US$46

Saskatchewan Bakken

US$47

Eagle Ford, USA Shale+

US$40–50 (+ Liquids-rich Eagle Ford plays, assuming natural gas prices of US$3.80 per mmbtu)

Lloyd & Seal Conventional Heavy, AB

US$50

Conventional Light, Alberta and Saskatchewan

US$58.50

Nebraska USA Shale

US$58.50

SAGD Bitumen Alberta

US$65

North Dakota Bakken, Shale

US$54–79

Permian Basin, TX Shale

US$59–82

Oil sands legacy projects

US$53

Oil sands mining and infrastructure new projects

US$90

This analysis "excludes "'up-front' costs (initial land acquisition, seismic and infrastructure costs): treats 'up-front' costs as 'sunk'. Rough estimate of 'up-front' costs = US$5–10 per barrel, though wide regional differences exist. Includes, royalties that are more advantageous in Alberta and Saskatchewan." The weighted average of US$60-61 includes, existing Integrated Oil Sands at C$53 per barrel" (As published).

Present day scenario at OPEC countries:


Currently the Oil prices have fallen to almost half below 60 $ / barrel, which is below the breakeven in the Gulf, thanks to OPEC’s refusal to cut production. This has impacted all the member countries in a way to revise their policies, while countries such as Iran and Venezuela face fiscal crisis.

Saudi Arabia, UAE, Kuwait and Qatar have substantial overseas reserves but Bahrain and Oman, both of whom have only small overseas reserves, have less room for fiscal maneuver. Since major factor controlling the economy of Gulf countries is from Crude Oil, not only the poor economic OPEC countries but also the Gulf countries have been affected by the falling Oil prices.

Impact of Crude Oil price fall on OPEC countries:

Break-even Oil prices in Middle East (CNN-Money Report: Oct’ 2015)

The United Arab Emirates, the third-biggest OPEC producer, took one of the measures early this year when it became the first country in the oil-rich Persian Gulf to remove transport fuel subsidies, when it linked gasoline and diesel prices to global oil markets.

Bahrain and Oman are hit so bad that the GCC Development Fund set up $10 billion to Oman and another $10 billion to Bahrain, to help with development projects in these two countries.

In all to summarize, at present the economies of Bahrain, Oman and United Arab Emirates are the gulf countries that have felt the heat but Saudi Arabia, Kuwait and Qatar are still reluctant to act to the situation and look for alternatives other than Crude Oil.

Predictions:

In the tug-of-war between rising and fall of Crude Oil prices OPEC should not forget that to run the country and to develop their help up development projects, they need to have a stable economy. The Crude Oil prices as seen today are expected to have gradual and slow rise, or in other words the Crude Oil prices are expected to stay to remain low for a period of time.

And hence, the OPEC needs to adjust to the changing Oil prices and think of alternate economic models, preserving their resources because if they don’t they will be running out of their money in near time.

By Abhinav Chawla