27/11/2014 - 13:54

OPEC blowback

27/11/2014 - 13:54

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The Organisation of Petroleum Exporting Countries may not be dead, but it is on life support – a status that contains a mixed message for Western Australia, as part of the state’s economy will benefit from potentially lower fuel prices while another part will likely be damaged.

OPEC blowback

The Organisation of Petroleum Exporting Countries may not be dead, but it is on life support – a status that contains a mixed message for Western Australia, as part of the state’s economy will benefit from potentially lower fuel prices while another part will likely be damaged.

For older readers, a suggestion that OPEC is struggling to survive after more than 40 years of dominating the global energy sector might be hard to accept; but the topic of survival will be an elephant in the room at an OPEC meeting scheduled to be held in Austria later today (Thursday).

They remember 1973, when oil-producing countries, especially those in the Middle East, embargoed oil exports in response to Israel’s lightning victory over Egypt and Syria in the Yom Kippur war, and 1979 when a second embargo over a crisis in Iran had the same effect of forcing up the price of oil.

The world is a very different place today thanks to multiple developments, all of which are weakening the power of OPEC and its ability to dictate the flow and price of oil.

Good news as that is for fuel users – especially industries that are heavy consumers of transport fuels such as mining and the long-haul truck operators – it is not good news for exporters of oil, or gas.

WA’s LNG exports, while generally sold under long-term contract, are ultimately affected by the oil price thanks to a complex formula based on a basket of different quality crude oils.

Woodside Petroleum, in time, will feel a squeeze on its profits from lower oil prices, as will Chevron and its partners in the Gorgon and Wheatstone LNG projects.

Whether the oil price will fall after tonight’s OPEC meeting in Vienna is a hot top in financial markets. The consensus seems to be that members of the organisation will agree to a production cut as an attempt to drive the oil price higher, though that could be a futile and unenforceable decision.

The problems confronting OPEC are manifold and largely self-inflicted, which is so often the outcome for any organisation with monopoly tendencies.

Ever since the 1973 oil embargo, the Western world has been looking for ways to escape the clutches of OPEC, an organisation largely made up of unpleasant dictatorships and kingdoms.

Higher oil prices unleashed the spirit of innovation, leading to the discovery of ways to tap unconventional sources of oil and gas, and encourage the development of non-oil energy sources, especially renewables such as wind and solar.

So, while the West was doing its best to get as far away from OPEC as possible (in the same way Europe is now trying to break Russia’s control on its gas supplies) the club of oil exporters set about destroying their own economies with lavish social-spending programs based on the assumption that oil prices would stay high forever.

In a way, what’s happening to OPEC today is a mirror image of what’s happening to the iron ore industry, which enjoyed artificially high prices during China’s boom that led to the development of a number of sub-economic projects that are now in the process of closing.

The OPEC crisis is more than an industry confronting a glut of its own making; it’s about entire countries that have spent their way into an existential quandary.

If, of example, tonight’s meeting does not agree on a substantial oil production cut then the oil price will probably drop below $US70 a barrel, meaning it will have fallen by 30 per cent in six months.

However, even if a cut of around 1 million barrels a day is agreed by OPEC, there is no way some of the near-destitute members of the organisation such as Venezuela will stick to their part of the deal because any cuts will further erode perilous budgets and trigger social upheaval.

Rising production of oil and gas in non-OPEC countries such as the US, Russia and Australia is the most obvious cause of the crisis that’s gripping members of the organisation.

But the real cause can be traced back to that original 1973 embargo, when suppliers of an essential raw material declared war on their customers, forcing the customers to find substitute energy sources.

Those substitutes are now filling the market with an abundant supply of energy from a variety of sources and the countries that blackmailed the world for 41 years are reaping what they sowed.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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