Update on Oil Prices

In last week's post Fears of an Oil Glut, there was a small but significant amount of interpretation of Saudi/OPEC motives. Therefore, it is gratifying to see that the Energy Minister of the UAE, Suhail al-Mazrouei,  has flat out said it for himself and OPEC in a news conference reported by AFP. He clearly lays out OPEC concerns about North America shale oil producers and OPEC market share.

The only thing left open to interpretation/speculation is whether this is the death knell of OPEC as an effective cartel. After all, al-Mazrouei is admitting that there is enough non-OPEC oil production to prevent the cartel from acting to raise prices, which is its primary reason for existing. Moreover, the production logic he lays out is based on the direct costs of production (known as upstream costs),  which consist of the costs of finding oil (finding costs) and the costs of extracting it (lifting costs). Since these are the factors one would expect to influence production decisions in the absence of a price setting cartel, it is hard to see what role OPEC would play.

Of course the Iranian president had a different interpretation, at least in public. President Hassan Rouhani claimed that Iran will weather the price decrease and that Saudi Arabia and Kuwait will suffer more than Iran. Furthermore, he portrayed the price slump as a plot against Iran (presumably by the gulf kingdoms) and said, "Those who have planned the oil price reduction against some countries should know that they will regret it."

To be sure, the gulf kingdoms will take comfort in any economic distress this causes Iran, but whether they view Iran or the shale oil producers as the biggest threat is an open question.