DHAHRAN, Nov 19: If things go by the current script, oil prices are in for a battering. Already they have touched the lowest mark in two years and further erosion in its market prices cannot be ruled out, if not already a certainty. In the wake of the absence of a reciprocating gesture from the non-OPEC oil producers, specially Russia, the possibility of firming up of prices in the global oil market are dismal and remote.
Things have changed drastically ever since the early seventies, when Opec used to be the only major player on the scene having the capacity to singularly influence the market. It had a dominant market share of almost 60 per cent then. Things are no more the same. The Opec market share has already gone down to around 35 per cent. Other significant players have emerged in the market and are increasingly having their impact on the market.
Over the last few years, Russia has been emerging as a potent force in the overall global oil scenario. It is already among the largest producers of the world and indeed the largest non-Opec oil producer. Its production capacity is expected to surpass eight million barrels per day next year. The overall stabilization of political situation within Russia over the last few years, ever-since Mr Putin came into power in Moscow, has helped the oil industry in the country a lot.
Russia now does not seem to be ready as yet to cut production beyond a token level of 30,000 barrels per day. As per reports, the influential oil industry in Russia seems to be vehemently opposing any drastic cut in its production. On the other hand among the non-Opec producers, Mexico has indicated its readiness to cut production by up to 100,000 barrels per day if an agreement is reached with Opec on trimming production, so as to somewhat salvage the dwindling global oil market prices. After initial reluctance another non-Opec producer, Norway also seems to be considering slashing its output. But the Russian insistence on not trimming its production significantly, is emerging as the biggest hurdle in an output cutting agreement between the Opec and the non-Opec oil producers.
Does this mean that another round of price slumps, as witnessed in 1986 and then again in 1998, is round the corner. Already some markets analysts are pointing to that eventuality. The Kuwaiti oil minister Adel Al-Subaih told the press in Vienna that there could be a repeat of the 1998 price crash when oil fell to $10 a barrel. “It wouldn’t be surprising,” he said.
Indeed there is a limitation what Opec could do alone to push the market up. It has already lowered its output limits thrice this year. But with Russia not ready to lower its oil output, despite the price slumps, Opec cannot go on doing so at the cost of its market share. Already senior analysts including Dr. Fadhil Chalabi of the Centre for Global energy Studies have been saying that Opec cannot continue to go on trimming its production and in the process lose market share to the non-Opec producers. It cannot simply continue doing so.
It seems, with the Russian production going up considerably in the recent years, Moscow strategically is keen to increase its market share. Increasing the market share is apparently emerging as the kingpin of the Russian oil strategy. However, this strategy in its wake is sending wrong signals and whether one accepts it or not, is pushing the oil market towards a round of “price war”.
Who can sustain this price war? Despite being a single product economy, Saudi Arabia and the other Opec member states appear to be in the best position to weather this brewing storm. The production cost in the Saudi Arabia and the other Gulf States are lowest as compared to anywhere in the world. These states in the past have been through phases of extremely low oil prices. With billions of additional dollars in their economy, the Gulf Opec member states appear to be in a better position than in the past years to weather and surmount the consequences of a ‘price war’. The non-Opec producers would in fact be in for a more severe pressure in case of any such eventuality.
Opec Secretary General Ali Rodriguez apparently said in this background that Opec was prepared for the consequences of a decision that could hit hard the economies of Opec, heavily dependent on petroleum export revenues. “We will suffer the consequences of this decision, we have no floor for prices,” he was reported by the press as saying. Indeed only low cost producers can sustain this price war.
Opec apparently had no other chance but to stand up to the market pressures. It could not lower its output any further risking further loss in market share. Saudi oil minister Ali Al-Nuaimi hence urged the Russians to heed the lessons of the past, referring to price slumps in 1986 and 1998. “This is a way to advise all producers that this course of action is disastrous and will lead us to a loss,” he told reporters after the Vienna meeting of the Opec.
Any price collapse would not only make it difficult for the non-Opec producers to withstand the price pressure, it could also hamper the development of new fields in other regions. Already many eyes are focused on Caspian belt and there are voices all around linking the present Afghanistan campaign to the deeper oil politics. In the long run the price war may turn out to be beneficial for the Opec oil producers. Indeed Opec cannot blink first in this fight for market share. It has to withstand pressure.