THE END OF OPEC?

The world is on brink of global change. Whereas before November 27 emphasis was placed on the political side of things, last Friday was a herald of a peculiar revolution on the world oil market. The Organization of Petroleum-Exporting Countries (OPEC) decided not to lower production levels, despite a 30 per cent drop in the price of "black gold." Having for many years played the role of global oil market regulator, OPEC ignored the fall in oil prices from 115 dollars per barrel in summer 2014 to 75-80 dollars per barrel. 

Although analysts had already predicted that the oil production quotas for OPEC countries would go unchanged, the oil cartel's decision delivered a blow to the oil market in a matter of minutes, pushing prices down to 70 dollars and setting a four-year record low. 

"Stable oil prices - at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand - were vital for world economic wellbeing. Accordingly, in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30 million barrel/d," the official OPEC report states.

OPEC's position was explained by Kuwaiti Oil Minister Ali Saleh al-Omair in an interview with the local satellite television channel Al-Watan. "Today there are many competitors. OPEC produces 30 per cent of world production. It would be impossible to decide to lower production, since our market niches could be occupied by others. Therefore we have decided that prices should set themselves in accordance with supply and demand," al-Omair stated. The minister explained that the organization's member countries have decided to not lose their clients.

"We will have to live with 80 dollars, or with 60 dollars, or with 100 dollars a barrel. We have to let the market itself set a price that will satisfy producers and consumers alike," seconds a Kuwaiti colleague of Ali Saleh al-Omair. 

Iran and Venezuela came out in favour of lowering quotas. For the latter low prices are especially painful. After the OPEC meeting, Venezuelan president Nicolas Maduro ordered that government expenditures be cut, with the main cuts affecting the pay of high-ranking officials, including Maduro himself. 

Although Iran and Venezuela pressured for lowered quotas, the position of the Persian Gulf states was decisive. Because of sanctions Iran produces much less oil than it is capable of producing - 2.5 million barrels, as compared to the 3.5 million barrels that it produced before sanctions began. The situations in Libya and Iraq are by no means conducive to maximum output. Consequently it would have been Saudi Arabia, Kuwait, and the UAE who ended up significantly cutting their production.

Quite a few preconditions for the drop in oil prices have accumulated. They are, first of all, strictly objective reasons connected to stagnation or weak growth in the world economy, and oversaturation of the market. In particular Europe's uncertain exit out of its economic crisis, made more severe by mutual Russian-Western sanctions, China's slowed growth, and a worsening Japanese economy have all led to reduced oil production. Whereas in early 2014 the International Energy Agency projected a rise in world oil demand by roughly 1.3 million barrels, the latest predictions gives a projected growth of only 0.68 million barrels, to 92.4 million a day. OPEC has an even more pessimistic outlook on daily consumption of "black gold" - 91.2 million barrels in 2015, just as in 2014. At the same time, oil production, at 93.6 million barrels, significantly exceeds the level of consumption. The principle contributors to the growth in production are non-OPEC countries; the growth in production is 1.68 million barrels, which is largely connected with the "shale oil revolution." Thanks to shale oil and gas the United States has increased production by 70 per cent since 2008 and has become the world oil leader, with production totalling 11.5 million barrels a day. Every aspect of the analysis of the oil price situation shows that the "shale oil revolution" coupled with global economic problems are the primary reasons for the dip in prices. 

Of course, there are also conspiracy theories about the drop - a number of experts believe that the United States is using its partner in the Middle East, Saudi Arabia, to try to punish Russia for its actions in the Ukraine. However, low prices undercut the growth of production in the US itself most of all - the cost of extraction for shale oil ranges from 50 to 80 dollars per barrel. Even under current conditions some projects are threatened with closure.

The cartel's decision to lower quotas may have provoked a price spike, but unless the global economy's growth problems are solved, this would give only a short-lived effect, especially since high prices would bring on an even greater development of projects to extract "expensive" oil, including shale oil extraction. Most experts are currently predicting a rather extended period of low oil prices. A certain jump is possible during the coming winter due to increased consumption during the cold weather, but the future of price quotes depends on global economic growth. Low prices for "black gold" happen to be one of the things contributing to accelerated growth in the global economy. According to experts, in the mid-term oil prices will regain their equilibrium at 90 dollars per barrel. 

In Russia's case current oil prices affect first and foremost the nation's budget, which is pegged to a price of 97 dollars per barrel. The devaluation of the rouble, however, levels out the pressure on the budget from low oil prices.

According to Russian Minister of Economic Development Aleksey Uliukayev, with oil prices at 100 dollars, a dollar was equal to 32 or 33 roubles, and oil cost 3,600 roubles. Uliukaev notes that at the moment, with oil costing 71 or 72 dollars and a dollar going for 49 or 50 roubles, oil costs the same when measured in roubles. "If the budget is reduced, and reduced well, we will even receive a certain surplus, a positive balance. And over all the financial system will be in fairly comfortable situation," he explained.

Russian President Vladimir Putin also sees no problem in low oil prices. "This suits us fine over all, and we do not see anything exceptional in it. Winter is coming, and I'm sure that in the first quarter of the middle of the year the market will find its equilibrium", Putin said. 

When measured in dollars the Russian economy, of course, loses considerable sums of money. According Uliukaev's figures, the Russian Federation's losses from the drop in oil prices are 90 to 100 billion dollars, with direct losses from sanctions making up 40 million dollars. 

On the other hand, for the time being low oil prices are not creating major problems for oil companies. For Rosneft the price of extracting oil is only 4 dollars per barrel. Admittedly, low prices and sanctions limit the possibilities for increasing production. "We are expecting a possible decrease in oil prices to 60 dollars and lower - but only in the first half of 2015," declared Sechin in an interview for an Austrian publication. "A price of 60 dollars suits us. However, we will have to move our deadlines for completing certain capital-intensive projects," he added.

Lowered oil prices do not augur wide-ranging trouble in Azerbaijan's case, either. The government has already taken into account the downward trend, lowering the price of oil written into the 2015 budget to 90 dollars per barrel as compared to 100 dollars for this year.

Azerbaijani finance minister Samir Sarifov believes that lowering prices on the world oil market to 60 dollars will not have a serious effect on state budget expenditures. "Despite the fact that oil prices on global markets have decreased by more than 30 per cent in the past three months, we do not expect problems financing the state budget's expenditures in 2015," the minister said.

A similar position is also held by Azerbaijan Central Bank head Elman Rustamov. He believes that prices closer to the level of 70 dollars per barrel will not stay around for long. "One of the leading world financial institutions - the IMF - predicts that oil prices in 2015 will be at a level of approximately 90 dollars per barrel. In 1998 oil prices fell to a level of 8 dollars a barrel; in 2008 they fell from 150 dollars to 35 dollars for a short time. It was all for a fairly short time. In both cases Azerbaijan showed that it has a stable, reliable economy. I am sure that in this case as well, despite low oil prices, Azerbaijan's strong economy will be prepared for these processes," said the Azerbaijan Central Bank head. "A positive trade balance is one channel for lowering the state debt. Our calculations say that even if oil falls to 60 or 70 dollars per barrel, Azerbaijan will have a positive balance of trade," he said.

The profitability of Azerbaijani oil extraction projects is in no way being called into question. According to Azerbaijan Center for Oil Exploration head Ilham Saban, a barrel of oil at the Azeri-Chirag-Guneshli oilfield, the country's primary oil production site, costs 5 dollars, counting refinement and delivery to the Sangachal terminal. If you add to this the cost of delivering the oil to the terminal in Ceyhan and to the Turkish shore of the Mediterranean Sea, then a barrel of oil costs roughly 12 dollars. Oil extraction by the State Oil Company of Azerbaijan (SOCAR), on the other hand, costs 16 dollars. This difference is largely accounted by the exhaustion of the fields exploited by SOCAR, resulting in larger expenditures.

The current oil price crisis has shown one important fact - OPEC is slowly losing its role as the main regulator of the oil market. Those at the cartel itself also understand this, otherwise they would not have ignored a thirty-per cent fall in price quotes. Regulating the market has also become more difficult - there are many new oil-producing countries, new technologies have been developed that allow the extraction of hard-to-reach oil, and the world has begun to be more thrifty when it comes to consumption of energy resources. Therefore it is entirely possible that we are on the threshold of the "oil cartel's" end after a half-century of it having an enormous influence on the world oil market.