Three Dilemmas Awaiting OPEC in the Future | agricultural trade | Scoop.it
OPEC faces some serious dilemmas over the short, medium, and long term.

 

OPEC faces a triple dilemma over the short, medium and long term, none of which have good outcomes for the cartel.

That strikes on OPEC’s medium term problem; the geological cost of production is now structurally out of sync with the geopolitical cost of survival.

 

Whether that ‘works’ as an effective coping mechanism remains to be seen; political outages might well help to lift interim prices, but this merely highlights OPEC’s long term nadir.

The higher prices go, the more demand will fall – and more importantly – non-OPEC production explodes beyond the cartel to drive down prices.

 

Any way you look at it, OPEC’s triple dilemma doesn’t have any easy exits.

 

Anything below $100/b is deeply problematic for OPEC over the medium term, precisely because they need high prices to politically survive.

 

When the market turns, price wars will rage across OPEC to set an effective price floor, and it will be Saudi Arabia that’s expected to provide the wood and nails.

 

If anything, it strikes at OPEC’s third dilemma: Even if prices lift to buy them more time, higher prices are the core of the cartels long term demise.

 

Around 200 billion barrels of global proven oil reserves have been added over the past five years, most of which is beyond OPEC states.

 

OPEC needs the golden eggs from high oil prices to forestall domestic unrest, but it needs them at a rate that will ultimately kill its supply goose.

 

If anything, it strikes at OPEC’s third dilemma: Even if prices lift to buy them more time, higher prices are the core of the cartels long term demise.

 

Not only will it reduce secular demand, it will encourage non-OPEC supply (both conventional and unconventional) to explode.

 

Around 200 billion barrels of global proven oil reserves have been added over the past five years, most of which is beyond OPEC states. Once capital goes into conventional plays, variable costs are low relative to fixed costs.

 

Economically, they’re what you could call ‘I’ve started so I’ll finish’ projects. Unconventional fields swing the other way; variable costs are high, which means supply is much more responsive to short term price.

 

Higher prices will induce and maintain higher production. And you’ve guessed it; that inexorably leads to lower prices over the median term.

 

OPEC can’t win any way.

 

Once market control is lost - the political implications don’t bode well for OPEC’s world - in what will become a lower price universe.


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