Opec has achieved an unprecedented degree of compliance with its current output target, exceeding its agreed production cut by 44%, but all is not as rosy as it might seem on the surface. This newfound sense of purpose hides a huge cost borne by two of the group’s members that found themselves on the wrong end of Saudi oil policy as prices collapsed and who may struggle to recover from the consequences.
The nature of this cost was clearly identified on 21 February, 2016 in a conference in Houston, where Saudi Arabia’s then-petroleum minister, Ali Al-Naimi, explained to a packed room of investors and senior industry figures why his country was flooding the market with crude. Perhaps—irritated by journalists who liked to characterize his country’s policies as a war on booming US shale supplies—Al-Naimi wanted to set the record straight.
The producers of those high-cost barrels must find a way to lower their costs, borrow cash or liquidate. It sounds harsh, and unfortunately it is, but it is the most efficient way to rebalance markets.
While that wasn’t entirely new, the thing that set his speech apart was the detail. Al-Naimi talked about how a price surge had “unleashed a wave of investment around the world into what had been previously uneconomic oil fields.” In addition to US shale he listed the Arctic, Canada’s oil sands, Venezuela’s Orinoco Belt and deep water frontiers.
All of those areas were affected by the slump in oil prices that accompanied Opec’s pump-at-will policy. But the impact was particularly brutal in two areas — and both are members of Opec. Two years on, the oil industries of Venezuela and Angola, which was at the forefront of deep water development, are looking a mess. And these nations’ dependence on oil revenues makes the collapse far more painful than it has been for other countries that have seen their production fall.
Venezuela’s output is now at its lowest level in almost 30 years, leaving aside the brief dip in production that accompanied the general strike at the end of 2002. A lack of investment and loss of technical expertise amid the economic chaos that has gripped the country has dragged output down from a peak of almost 3.5 million barrels a day reached in 1998, shortly before President Hugo Chavez came to power. The country’s output has fallen by 460,000 barrels a day from the October 2016 level used as a starting point for Opec’s cuts agreed in November that year. As part of that deal, Venezuela pledged to reduce production by a more modest 95,000 barrels a day. Read More