Here’s Why OPEC Is In Huge Trouble In 2016

Getty Images

Getty Images

Saudi Arabia’s decision last year to not cut oil production to buoy crude prices has set off a production boom that not even OPEC, the world’s oil cartel, can stop from pushing prices down even lower, according to some analysts.

This spells trouble for Saudi Arabia and other OPEC nations whose finances are being hammered by crude oil prices 60 percent below where they were a year ago.

“We’re in untested waters,” Judith Dwarkin, the top economist at RS Energy Group, tells The Wall Street Journal. “This is an oil market that … since commercial trading began, has either been under the sway of monopolies, oligopolies or a cartel.”

Producers have an incentive to produce as much oil as possible rather than cut production in order to make up for low prices. As of Wednesday, crude oil prices were below $40 a barrel — $37.87 on international markets — and prices are expected to stay relatively low for years to come.

“The idea that OPEC and the other large oil producers like Russia would reduce output at these lower prices is misguided,” John Brynjolfsson, the chief investment officer at Armored Wolf, tells The WSJ. “For a couple of years to come, output will exceed demand.”

Investors are now having trouble deciding where to put their money. The WSJ reports investors are increasingly looking outside the U.S. and OPEC for answers as Russia, Brazil and Norway have all increased production more than forecasting agencies predicted. Experts expect global oil production to continue to grow as producers focus on efficiency and try to drive high-cost producers out of the market.

Most of the oil supply growth in 2016 is expected to come from the U.S. and OPEC, but it’s not clear how much longer cartel countries can pump at these prices before their financial reserves are completely depleted.

Saudi Arabia’s deficit hit $98 billion this month because of low oil prices — which make up nearly all of its government revenues. Government costs are up and oil revenues are down, and the Kingdom is refusing to make any coordinated cuts with other OPEC countries.

In 2013, the Saudis needed oil prices to be $92 to fund government spending. Now, prices are less than half that and Kingdom spending has increased 13 percent from last year.

Further complicating things for Saudi Arabia, OPEC’s largest oil producer, is that Iran could be sitting on $1-a-barrel oil, according to the same man who predicted crude would be below $20 a barrel this year.

Anatole Kaletsky wrote Tuesday that Iran “claims to produce oil for only $1 a barrel” — production which could easily be ramped up once international economic sanctions are completely lifted. Though, it’s not clear Iran could actually produce oil this cheaply despite claims made by its national oil company.

Posted by The Daily Caller.

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