The oil cartel OPEC surprised many Thursday as it failed to cut petroleum production quota in response to global meltdown in oil prices.
The cartel was highly expected to make some review in the production quotas of members as countermeasure to the plunge in prices in recent months, resulting already in more than 30 percent decline in prices.
For three years, OPEC had little trouble keeping prices in the $100-a-barrel range that many of its members consider satisfactory.
But markets have spun out of OPEC’s control of late. Prices have come under pressure as global output of crude oil outstripped demand this year. Analysts forecast excess supplies of crude to continue to build in 2015.
The main new source of supply is oil extracted from shale in the United States, which is expected to add about 1 million barrels a day of oil production this year and an additional 1 million barrels a day in 2015.
OPEC seems at a loss about how to cope with this new source of competition and is also struggling to influence other big producers outside the organization like Russia and Brazil. Unable to come up with a strategy for handling these new developments, the cartel has decided not to intervene, evidently hoping that low prices will eventually curb production in the United States.
The price decline “does not mean we should really rush and do something,” OPEC’s secretary-general, Abdalla El-Badri, told reporters after the meeting here Thursday. “We don’t want to panic,” he said. ‘’We want to see how the market behaves.”
Even though lower prices will hurt oil producers in the United States, the U.S. economy will probably benefit as consumers have more money to spend and companies’ energy bills decline. Europe and Japan, both large oil importers, are also likely to get a boost from lower prices, although in Europe high taxes on energy limit gains for consumers.
Lower prices, on the other hand, could be very painful for OPEC producers, who depend heavily on oil revenue.
Some of the world’s largest exporters of oil, including Iran, Iraq, Saudi Arabia, the United Arab Emirates and Venezuela, are members of OPEC. The group meets at least a couple of times a year, usually in Vienna, where the organization has its headquarters, but sometimes more often to discuss and try to manage the global oil markets.
While Saudi Arabia, Kuwait and the United Arab Emirates have each stashed away hundreds of billions of dollars in savings to buffer the effects of lower prices, Iran, Algeria and Venezuela, for example, will struggle to finance their government budgets at current price levels, according to a recent study by Rachel Ziemba, an analyst at Roubini Global Economics.
Venezuela and some other producers badly wanted a cut to prop up prices and will be bitterly disappointed by the meeting’s outcome.
Analysts say that Thursday’s announcement signals a radical change on the part of OPEC. Bhushan Bahree, an OPEC analyst at the market research IHS firm, called the announcement “a major tactical shift.” For decades OPEC has intervened to manage oil prices, cutting production when necessary.
“Now they are defending volume and letting the rest take care of itself,” he said.
Analysts say that at least some OPEC powers appear to have recognized that lower prices may prevail for a considerable time. In that situation, the organization needs to work on regaining market share.
While exports of crude oil from the United States are still restricted, the surge in output is being felt on global markets as a result of the increased export of refined petroleum products like gasoline.
American imports from OPEC and elsewhere have also been sharply reduced, forcing OPEC producers to compete for the remaining markets in Asia and Europe. Iran, for instance, is storing as much as 100,000 barrels a day on tankers because it is unable to find markets.
Analysts say the surge in supply from the United States poses particular challenges to OPEC because there is little the producers’ group can do but hope that lower prices will eventually discourage investment in drilling in the United States, thus reducing production.
The dynamic has shades of the early 1980s, when new crude supplies emerged from the North Sea, Alaska and Mexico, sending prices falling and squeezing OPEC’s market share.
“OPEC faces its greatest threat since the early 1980s,” said Mr. Bahree, the analyst.
This divide between the countries that can endure low prices and those whose economic needs are more pressing is probably affecting OPEC’s efforts to come up with a response to the declining price. Venezuela and Libya.
