Saudis continue to squeeze OPEC profits
VIENNA — Saudi Arabia showed little concern for fellow OPEC members by unilaterally cutting its oil prices to the United States this week, a move that casts doubts on the cartel’s credibility and its ability to find a common plan to stabilize the slumping energy market.
And while OPEC struggles to find consensus, oil prices risk remaining low — or falling further — to the benefit of consumers and businesses in the United States and worldwide.
OPEC is riven by differences among its members on what the ideal price level should be. That is exemplified in the rivalry between heavyweights Saudi Arabia, which can withstand lower prices, and Iran, which relies on a stronger market to remain profitable.
The Saudis’ unexpected move on Monday to cut prices, aimed at protecting their U.S. market share, will exacerbate those conflicts — weighing on the market and hurting most other OPEC members economically.
“At the end of the day, this is still the Saudis’ cartel for better or worse — and for smaller members, this is definitely worse,” said oil analyst Phil Flynn, alluding to the fact that, despite OPEC’s credo of consensus and unity, the organization is de-facto controlled by its top producer.
The prime motivator for the Saudis is to compete against U.S. shale oil. But John Hall, chairman at Alfa Energy, sees other benefits for the desert kingdom.
Russia, which competes with OPEC, is hurting from low oil prices and Saudis are tightening the vise — “seizing the opportunity to reduce prices, hit Russia and hit Iran in one go,” he said.
When the cartel meets later this month to discuss how to manage the recent market slump, tensions are likely to fly high — and hopes for concerted action are low. Flynn calls the current price slump the “biggest threat (to OPEC’s unity) since oil hit the $10 range” 15 years ago.
The price of crude hit three-year lows on Tuesday on news of the Saudi move. On Wednesday, the benchmark New York contract recovered only slightly to trade just above $77 a barrel. The international grade of crude also hit multi-year lows.
These levels are manageable for the Saudi government, as its coffers are well-padded and its oil production costs are relatively cheap.
Not so for many others within the 12-nation oil-producing organization who have higher extraction costs and national budgets dependent on higher crude revenues.
Even without the Saudi price discounts, Iran’s ability to export oil was slashed by international sanctions imposed over its nuclear program. Tehran, which once hoped to displace the Saudis as OPEC’s top producer, has seen its oil revenues nearly halved as a result.
If sanctions were to be lifted as part of a nuclear agreement later this year, Iran still would need prices close to $140 a barrel to finance the government budget. Crude export revenues finance more than 50 percent of the government’s outlays.
Venezuela also will be hurt. The International Monetary Fund said Venezuela needs to sell oil around $120 a barrel to avoid the threat of national bankruptcy. Bank of America estimates that for every dollar that oil prices drop, the state loses $770 million in net revenue over a year. That puts revenue $12 billion a year below peak levels.