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Dancing Numbers and Musical Chairs on the World Crude Oil Stage

The members of OPEC (Organization of Petroleum Exporting Countries) are to convene at the end of May 2013 in a meeting in Vienna at which they will decide whether to maintain daily oil production levels and to reconsider its present price. The oil scene is somewhat convulsed.
  • Consumption rises while prices remain in a wait-and-see situation.

 

  • New methods of extraction, new oil fields being opened up and improved energy efficiency in the United States could bring about a major turnaround in the market.

 

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OPEC Data

 

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The members of OPEC* (Organization of Petroleum Exporting Countries) are to convene at the end of May 2013 in a meeting in Vienna at which they will decide whether to maintain daily oil production levels and to reconsider its present price. The oil scene is somewhat convulsed.

In its report dated January 2013, OPEC estimated that the world crude oil demand would increase by a bare 0.85% in comparison with 2012. However, one month later, it produced a new, higher figure based on incipient signs of economic recovery and the cold winter in some regions.

The report notes that in February this year, the OPEC member states increased production to 30.3 million barrels per day (MMBD), the highest figure since November 2012, which was due to a higher output in Saudi Arabia and Iraq. In April, OPEC estimated consumption for 2013 at 89.6 MMBD (840,000 barrels more than in 2012, or an increase of 0.9%) and reported a downward trend in prices since March. However, over the past few weeks, and as the OPEC website confirms, the price per barrel is still rising.

 

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El ministro de Petróleo y Minería de Venezuela, Rafael Ramírez, afirmó a mediados de marzo que “existe una sobreoferta de petróleo en el mercado”. Un mes más tarde, el representante de Irán ante la OPEP, Seyed Mohamad Ali Jatibi, anunció que la organización va a reducir su producción para evitarlo y comunicaba que se habían vuelto a reducir las previsiones de crecimiento en la demanda mundial de crudo debido a los problemas de la zona euro y de la incertidumbre económica que está experimentando Estados Unidos.

 

What the Analysts Say

Is the United States Redrawing the Global Oil Map?

 

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China is now the world’s largest oil importer. For the first time in the last forty years another country has “usurped” this position from the United States which, on the other hand, is now exceeding the output of Iraq with the sum of oil production in only three of its states (North Dakota, Ohio and Pennsylvania). This situation represents a turnaround in global oil production and consumption, an upheaval that could have major geopolitical consequences.

 

What Factors Are Bringing about This Change?

The United States is now reaping the benefits of new drilling techniques, which have opened up access to vast oil and domestic natural gas reserves. At the same time, its policies of developing alternative energy sources and encouraging consumption efficiency are also bearing fruit. These factors have led some experts to venture that the United States could achieve energy self-sufficiency by the end of this decade. In other words, it could go from topping the list of the world’s crude oil importers to disappearing from it altogether.

 

Immediate Consequences: Winners and Losers

If the forecasts prove true, the United States and its allies – Canada in particular – will be occupying the privileged position of powerful players in this new scenario. In fact, the new situation has consequences that were unthinkable not very long ago. One good example of these is the repercussions of the sanctions against Iran. Increased production in the United States, in addition to higher production levels in Iraq and Libya, has meant that, despite the fact that the United States has ceased to count on the one million MMBD which Iran no longer exports, prices have remained stable (in contrast with Teheran’s predictions). In other times, the sanctions against Iran would have triggered higher prices.

 

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Long-term Consequences

If the United States maintains its present production trend, it will soon have a surplus of eight million barrels per day, which would represent a serious predicament for OPEC. It could then lose its influence on price fixing, which might bring about a sharp drop in crude oil prices.

Moreover, the economies of many countries are bound to high oil prices. If these prices should fall, their national budgets would be seriously affected.

A global analysis of the situation would seem to suggest that OPEC is faced with both internal and external challenges. On the one hand, there is the newly independent position of the United States and, on the other, the present increased production in Iraq after so many years of sanctions and armed conflict.

 

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While it is true that OPEC has traditionally had the option of regulating crude oil prices by means of employing mechanisms such as overproduction (basically counting on Saudi Arabia) in order to punish noncompliant members, continuing with this price-lowering strategy now would entail risking its solidity as an organisation. Saudi Arabia, for example, now questions the new global scenario, arguing that the new extraction techniques being used in the United States still present many question marks, referring in particular to the environmental issues entailed.

Data to Bear in Mind

The United States is now extracting crude oil that closely resembles that produced in Nigeria and Angola, which puts both countries in an unfavourable position and, according to some analysts, could jeopardise Nigeria’s refining industry.

Similarly, Canada is producing cheap heavy fuel oil, which might have similar consequences in Venezuela (if Obama gives the green light, for example, to the Keystone Pipeline System between Canada and the United States).

Mexico is also increasing its production now, which means that the minimal future demand from the United States could be met by friendly countries like Canada and Mexico, without any need to depend on Venezuela.

*The OPEC members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates (UAE) and Venezuela.