The Organization of the Petroleum Exporting Countries (OPEC) decided to cut production by 750,000 barrels per day to 32.5 million barrels, the first reduction since 2008 agreed by major producers of crude oil, after Saudi Arabia succumbed to a growing chorus of producers who have called for measures to stabilize the market, being affected by the low prices.
Saudi Arabia announced that Iran, Libya, and Nigeria should “be able to produce the maximum amount of oil that is justified.” Softening position including Saudis comes after it began to have problems because of low oil prices.
Saudi Arabia gave up after massive spending in the past two years. Saudi Arabia has reserves of 627 billion dollars and can last long with the current low oil prices. But last year the state recorded a deficit of 115 billion dollars, equivalent to 13.5% of gross domestic product (GDP).
And this year Riyadh has spent an additional 52 billion dollars so far. Also, to conserve finances Saudis have begun to reduce subsidies for the population fuels, electricity, and water, which until recently was taboo. It also imposed for the first time in history VAT and consider postponing investments of 20 billion dollars. Austerity begins to make its presence felt already.
International Monetary Fund (IMF) has calculated that Saudi Arabia needs an oil price of 66.7 dollars per barrel to reach zero budget. Now, Saudi Arabia extracted 10.7 million bpd after extraction in 2006 was 9.1 million. Oil is now 70% of budget revenue authorities.
Iran, the first outright winner
On the other side, Iran produces 3.6 million barrels now but wants to reach a production of 4.1-4.2 million, the level before sanctions. Moreover, ten years ago, Tehran’s oil production reached the level of 4.1 million barrels per day. Iran’s economic situation is, however, better. The Persian state has only to gain from increased production, for it would have more money at its disposal. Also, the price necessary for zero deficit is lower than in Saudi Arabia, 61.5 dollars per barrel. Furthermore, sales of hydrocarbons merely 50% of the state budget, Iran having a more diversified economy than Saudi Arabia. Incidentally, Rafael Correa, Ecuador’s president, blamed Saudi Arabia for the current situation and said the risk is that OPEC rupture. He said that the oil price issue is not economic but geopolitical. He said that Saudi Arabia has taken market share because of sanctions on Iran’s nuclear program, and now Riyadh site “does not want to give it back.”
Libya and Nigeria, in desperate need of money
The pressure on Saudi Arabia also increased because of attacks against productions facilities in Libya and Nigeria, who are still recovering. Libya now produces about 400,000 barrels a day, a quarter of what it was before extraction of the civil war that led to the killing of the dictator Muhammad Ghadafi. Libya has still need massive funds for rebuilding the country. According to calculations made by Bloomberg, Libya needs 195 dollars a barrel for the zero finances. And Nigeria pushed for action to stabilize prices because it needs a price of 104 dollars per barrel for the budget balance. Moreover, naira, Nigeria’s national currency, depreciated by 40% over the past 18 months due to the oil situation, according to Vanguard.
Venezuela, in full food crisis
Simultaneously, Venezuela has put pressure on finding a solution, the South American state having solved a major economic and social crisis. Food shortages in Venezuela reached so high that people hunting cats on the streets and protesting in the streets of Caracas. Recall, Venezuela is the country with the largest oil reserves in the world, even larger than Saudi Arabia, but is affected by a major energy crisis, caused by drought. Member of OPEC, Indonesia needs a minimum price of crude oil, because it is a net importer, while no data for Gabon on the price. On the other hand, as OPEC does not control only 40% of world production, the decision to reduce extraction produces winners and elsewhere.
Russia, the big winner
The first winner indirect Russia, who asked since the beginning of an effort to freeze production. Although Russia participated in the talks in Algiers, the state is not part of the agreement within OPEC. Russia is affected by international sanctions and falling prices, so that a decision to reduce the extraction will increase oil prices. Further, this will benefit both Russian companies such as Rosneft, Gazprom and Lukoil, and the Moscow government budget. Moreover, Russia is pumping more oil now how can it reaching 11.1 million barrels per day above the 10.7 million barrels in August. The ruble depreciated by over 50% compared to 2014 due to lower international oil prices and sanctions imposed for the annexation of Crimea and support for the rebels in eastern Ukraine. But just this massive depreciation of the ruble is now helping Russian companies to increase their production because they have reduced internal costs, while the vast majority of earnings are in dollars.
Other countries advantaged by OPEC decision:Norway and Mexico
Mexico is another winner of the OPEC decision, according to Bloomberg, the Latin American state is one of the largest producers in the world with 2.6 million barrels extracted daily. The same is true for Norway, which extracts 2 million barrels daily. The two countries have some of the largest oil companies in the world, respectively Pemex (Mexico) and Statoil (Norway).
US producers that extract oil from shale and the Canadian oil sands in Alberta exploiting enjoy themselves a respite. Furthermore, “oil war” was triggered by Saudi Arabia to unpublished American oil producers that bring oil shale, but it was only partially successful. If oil prices rise on the stock consistent, then they are saved. In May 2015 the US produced an amount of 9.6 million barrels per day, and now production fell to 8.5 million, according to EIA, the US Energy Administration. Canada produces 3.9 million barrels per day. Canadian Natural Resources Ltd. shares and Crescent Point Energy Corp. rose at least 5.9% on the stock market after the announcement of OPEC.
Oil services companies
Service companies are other winners. While falling prices, they have suffered as energy groups have postponed investments of hundreds of billions of dollars. Now, with the start of rising prices, oil giants will resume investments so that companies providing services will have more orders. China Oilfield Services shares jumped 11% after OPEC announcement, as investors expect to have more orders.
Central banks around the world
Both the Federal Reserve – the US central bank – the European Central Bank and the Bank of Japan will benefit from the signal given by OPEC. They are struggling with negative interest rates and low inflation and the increase in oil prices will lead to higher inflation.
Losers after OPEC decision: drivers and tourists
Drivers and tourists are the main losers of the OPEC decision. As the price of oil will increase and fuels will increase, which will directly hit the wallet drivers worldwide. There will also be affected airlines, which will be faced with increased costs with kerosene, while tourists flying by plane will have to pay more for a ticket.
Infographic with the most important statistics from the oil industry: