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OPEC: Things Fall Apart?

It is hard not to chuckle at the delicious irony whereby OPEC are meeting in Vienna at the same time as the 2015 United Nations Climate Change Conference in Paris. Anyway, Africa’s oil exporters have only one focus.

While drivers and industrialists in Europe and North America remain in celebratory mood, the plunge in the oil price since June 2014 has blown a massive hole in the economies of Africa’s OPEC members who include Libya, Nigeria, Algeria and Angola. Moreover, unlike the Saudi Arabia, Kuwait and Qatar, they do not have billions of petrodollar reserves to help cushion the blow.

So what do Africa’s oil exporters want tomorrow? Uppermost on their wish list is for the cartel, with a specific stare at Saudi Arabia who control 30% of all OPEC output, to significantly reduce its collective production quota of 30 million barrels a day, in order to cut the global oversupply and hopefully kick-start the process of forcing prices from whence they came. The fear is that it may no longer be fantastical to envisage oil at $25 a barrel by the middle of 2016.

They can forget about it. Saudi Arabia along with their friends in the Gulf Coast have played lip service to the idea with the seemingly reasonable but patently unachievable counter-offer of including Iran, Iraq and non-OPEC producers such as Russia and Mexico in any deal to cut output. The key point is that the Saudis are determined to keep supply high and prices low in order to drown US shale oil producers in particular. The thinking is that OPEC can recoup any losses later when they and other non-OPEC suppliers have retreated from the market.

Seen through these lens, the Saudis who themselves have cut public spending by 25% this year, can point to some signs of success. US crude production has fallen since the spring and, equally importantly, the squeeze on shale exploration companies has forced them to trim capital expenditures which will press on supply in the coming years. Meanwhile, the low oil price is stimulating demand which is estimated to be rising at its fastest pace for five years. It is not inconceivable that their strategy may leave OPEC with a win-win outcome of a higher market share at higher prices than they would achieve if they panic and cut quotas now.

But there is a huge swathe of uncertainty around the US fracking industry. Many shale outfits have hedged against the current market price and it is unclear how many of these would be forced to blink once their contracts expire. Moreover, it may not be as costly as the Saudis hope for them to reactivate their rigs if a rise in price made them potentially profitable again. In the worst case scenario, the Saudis and shale producers could between them keep oil prices close to current levels, or lower, for decades. Could it be time for its African members to split from the OPEC circus?

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