OPEC Fails to “Expand the Quota” – What’s the Problem?
In early June, OPEC failed to ratify Saudi Arabia’s proposal to raise the production quota by 1.5 million barrels/day. The vote was a clear slap to the largest producer, and the member with, by far, the most spare capacity within the cartel – whether it was 2 million b/d, as skeptics argue, or over 3.5 mm b/d, as Aramco would have it. Many argue that, in effect, OPEC no longer has a production quota. Huh? When DOES OPEC have a production quota? Well, compliance is usually pretty good ‘in the trough,’ and usually after members suffer the pain of violating their own targets. But in tight markets? Six members voted against Saudi’s proposal — five of them are already exceeding their targets by 1.25 mm b/d – 80% of the proposed quota hike! Libya, the sixth, was producing about 5% above its target in January, the last month of full activity. Saudi’s proposal was, as usual in relatively tight markets, an effort to ‘legitimize’ the existing over production. One could argue that if the Gang of Five were serious, they’d CUT output to meet the old targets!! Not likely to happen.
So, Aramco is on the way to adding a million barrels a day, if there are customers for some of the cartel’s heaviest, most sour, least marketable, hydrocarbons. The market wants refinable product, not fuel oil. And the hypocrisies within OPEC continue… Global demand growth has stabilized at a 1.2 million b/d rate, a little less than forecast, but the next spike, which may be demand-based, is a comin…. “wait for it…
This morning’s decision by International Energy Agency members, including the US, to release 60 million barrels of ‘refinable crude’ from strategic reserves, is a short term effort to provide more higher quality oil to help offset the loss of Libyan quality/output. This doesn’t address the short term mismatch, and, in the view of some, is another slap at OPEC who, some day, might respond to a request for more output with “why don’t you handle it?”
“ Things get stranger and stranger in the Middle East. Last month, the UAE hired McKinsey to evaluate Clean Coal opportunities for power generation, in the face of rising costs of its own subsidized oil/gas/electricity programs. This month, Kuwait, after fifteen years of trying to add refining capacity to (in part) feed power producers, and three years behind on a planned natural gas development, acknowledged that a coal fired plant might be its easiest and most economic solution (Kuwait produces no coal). The conclusion grows — most of the Middle East is caught in its own web of subsidies, and is unable to improve efficiency or optimize its power mix. Either the waste continues, or countries must find a way to direct the cash flow from oil production/exports toward more efficient uses, without further oppressing its poorest citizens. Is subsidy fatigue entering the final phase?