OPEC’s Dilemma. Qatar withdrawal from OPEC is a monumental event.

Qatar withdrawal from #OPEC is a monumental event that signals the likely end of the cartel. Watch my interview at @WIONews India.

The fundamental problem of OPEC is the evidence of the division between two groups. One, led by Iran, which wants higher prices and deeper cuts, and the two largest producers, Saudi Arabia and Russia, who support a more diplomatic position.

Iran wants to continue increasing its own production yet wants OPEC to maintain the group cuts. Iran also faces the backlash of sanctions on exports. Today, the US exports more oil than Iran.

Saudi Arabia and Russia have the lowest production costs and are the ones to gain more from an increase in their market share.

Iran, Venezuela, Ecuador and other countries that have production and geopolitical problems suffer the most.

Now, Qatar withdrawing from OPEC only highlights the division and weakens the position of the cartel. Qatar is not a large producer of oil, at an expected 600 thousand barrels per day (kbpd) for 2018, but its exit puts OPEC only controlling 31 mbpd of production, less than a third of the total world output.

Global oil supply hit a record high in August 2018 at 100 million barrels per day (bpd). Non-OPEC supply increased year-on-year, led by the U.S., while OPEC’s crude supply hit 32.63 million bpd.

Furthermore, Qatar is a global leader in natural gas and LNG. Qatar knows that they need to strengthen their position and be independent in their production decisions if the country wants to be a global leader in the decarbonization of the world economy.

By withdrawing from OPEC, Qatar signals the forthcoming end of oil as the driver of the world’s future growth and anticipates the rising importance of natural gas.

In addition to showing the tension between these two sides, the forthcoming
OPEC summit also reveals that the cartel has much less market control than they would like to have. The fact that the oil price has only reached 80 dollars a barrel (compared to 100-130 dollars a few years ago) only to collapse to $60, indicates that their ability to manipulate prices to 100 dollars per barrel is very low.

The recent production cuts have been the greatest gift to shale. Oil production in the United States already exceeds 11 million barrels a day and independent companies have strengthened operationally and financially. As such, the long-term oil curve indicates a moderation of up to $ 15 per barrel in the coming years.

The reason why prices were soaring recently was the artificially limited supply from OPEC as well as political risk in Iran. Now it seems more reasonable and the oil curve indicates prices closer to the fundamentals. The situation of supply, demand, and inventories is more aligned with historic levels.

The challenge from now on for OPEC and for oil producers is not to seek artificial price inflation, but to improve efficiency. OPEC cannot stop disruptive technologies, such as the electric car, and needs to stop thinking about oil prices by looking at the past, but to pursue cost efficiency and the diversification of their economies.

The big problem with OPEC is that when prices went up they became accustomed to an unjustified oil revenue and when the barrel went down they faced huge deficits from unsustainable subsidies.

OPEC’s devil’s alternative is that it cannot stop its diminishing influence on prices and, at the same time, it has to diversify their economies and exit from the curse of the petro-state: Not developing the economy because oil revenues perpetuate inefficient growth models.

The period of price manipulation was a failure. US producers strengthened, diversification and technology accelerated and prices barely rose to $80. Now OPEC must think about the future, forgetting an inflationary past that will likely never return.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

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