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December 26, 2014

OPEC's Looking Beyond Price

By Evan Kelly, Oilprice.com

While much has been made of the oil price war theories lately, whether it is a direct competition between the United States and Saudi Arabia, or whether the two are in collusion to cripple the Iranian and Russian economies, there is another aspect to the current situation that is worth considering.

OPEC revenue

In this chart, we see OPEC revenues declining by approximately 8% from 2013 to around the $700 billion mark. With the recent PR campaigns by OPEC oil ministers explaining the cartel’s November 27th decision not to cut output as good capitalism and claiming that they never will cut regardless of the price of crude, the forecast for OPEC revenues for 2015 may beg to differ.

Should prices remain at current levels, the cartel could lose almost $400 billion in annual revenue by 2015, a 50% drop from 2013 levels. While the several of the Arab member states have huge currency reserves to support their economies, this level of decline in revenue would be completely unsustainable for some of the more at-risk members of the cartel such as Iran, Nigeria and Venezuela.
OPEC Breakeven prices
Source: Wall Street Daily

OPEC accounts for 40% of the world’s crude oil production. Within OPEC, Saudi Arabia, Kuwait and Iraq together hold over half of the cartel’s revenue between them.

OPEC Net Oil Revenues 2013

With this in mind, it could be that these three members of the cartel are fully aware of the new reality in the oil markets, and that a new era of sub $80 oil is more likely than not. When a former head of OPEC states that the cartel has lost its influence over the energy markets it may not be just major oil companies hoping to downsize their operations.

Adding credence to this theory is the worrying news coming from OPEC member Venezuela, who looks to be in severe danger of default. If the overabundance of oil continues much longer in to 2015 then it may no longer be worthwhile maintaining the memberships of economically unsustainable members. 

Courtesy Evan Kelly, Oilprice.com via Wolf Street 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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