Last weekend, 16 global petroleum producers met in Doha, Qatar for a much anticipated meeting. It was expected the attending producers were set to agree on what steps to take to rebalance global oil supplies in an attempt to place a floor under oil prices. Ahead of the meeting, Saudi Arabia had said they would freeze crude oil production in their country at January's (elevated) levels.
OPEC has long been referred to as a "cartel" which was in place to ensure petroleum based profits would remain healthy. Indeed, in years past, Saudi Arabia, the largest crude oil producer on the planet was able to adjust production either upward or downward to balance global supplies, thereby, managing global oil prices, and ensuring profits. So why has this cartel which has been so agile in adjusting production in response to market fluctuations and effective in supporting high oil prices been unable to stop the bleeding in global oil prices?
There are a few reasons that come to mind but what it really boils down to is that the organization which once put the "O" in OPEC has become fragmented by economic woes due to the decline in crude prices, and each has put their own nation's issues above the greater good of the global cartel. Some by choice, others as a result of declining national revenues and strength in the petrodollar.
Venezuela sits atop some of the largest proven reserves of crude oil in the world, but has fallen into economic calamity. Venezuela, once a wealthy, self-sufficient South American nation which boasted robust agriculture, and diversified revenue sources drank the crude oil kool-aide through the end of the last century, and now relies on crude oil exports for up to 96% of its national export revenues. As Venezuela milked the crude oil cow, and socialism redistributed assets to government control, non-petroleum related economic sectors began to shrink.
That was fine as long as oil profits continued to buoy Venezuela's revenues. Rather than focusing on manufacturing and agriculture, imported goods overtook domestically produced products, leaving the everyday Venezuelan reliant on currency balances with the U.S. dollar to fill its needs for things like food, raw materials and manufactured goods. As oil prices began to sink, and the Venezuelan currency -- the bolivar -- sank in kind compared to the strong U.S. dollar, inflation skyrocketed, jobs were lost and the people are to this day standing in increasingly long lines for the basic essentials of life and turning to the black market.
Some of Venezuela's problems have stemmed from the government's refusal to update infrastructure in their state-owned oil production facilities and refineries. Those have now begun to fail and the result is declining oil output despite the desperate need to stay active in global crude oil trade since, again, 96% of Venezuela's national export revenue comes from global oil sales. Infrastructure problems will limit Venezuela's oil production prospects until some major investments are made in production infrastructure.
Venezuela cannot afford to cut or freeze production because without oil revenues, they have no other way of generating significant national revenue.
Nigeria is having similar problems with a lack of diversity, a problem which has, of late, been compounded by sabotage on crude oil infrastructure which has reduced crude output over the past several weeks. Libyan crude oil production has fallen to its lowest historical level, and that country is now operating at a budget deficit of roughly 60% below GDP. Nigeria was once the number one crude oil producer in North Africa, but is now more concerned with internal strife and the potential threat of infrastructure disruptions at the hands of ISIS and other such groups.
Ecuador is still reeling from a recent earthquake which will be expensive to bounce back from, and reliance on falling crude export revenues will keep them producing as much as they can for the time being. Kuwait is working through labor issues as crude oil workers have recently returned to work after a strike, which is part of the recent runup in global benchmark crude pricing. As crews get back to work, they will be pumping crude at or very near capacity to catch up with lost marketshare.
And then there is the growing rift between Saudi Arabia and Iran. We will get to that in next week's post, but relations between the Sunni Saudi Arabia and Shiite Iran are chilly at best in the present day. As Iran looks to regain pre-sanctions marketshare, their refusal to cut production has irked the Saudis to the point of disrupting the Doha meeting, and has suspended hopes of a production freeze.
The suspension of those hopes will continue to weigh on OPEC and non-OPEC oil profits, especially in countries like the above who, because of infrastructure problems and lack of economic diversity have swung too far toward reliance on oil profits for maintaining national export revenues, and domestic economic growth.