Last week, the Organization of the Petroleum Exporting Countries (OPEC) met in Algiers and agreed to a general framework of an oil production decrease. The news spiked U.S. oil prices which are nearing $50 per barrel, while global prices are at the highest point since June. The specifics, however, remain a mystery. If recent history is a guide, nothing substantive may occur at the November 30th OPEC meet to put some meat on the plan’s bones. However, the Algiers session may set the stage for important answers about what to expect in the future.
The framework agreement envisions OPEC nations cumulatively reducing daily production by 200,000 to 700,000 barrels per day. Given there is a current supply surplus, which has existed for roughly two years, that could put supply and demand in more of an equilibrium and therefore raise prices. However, the daily surplus of oil is currently about a million barrels each day. Roughly 94 million barrels are produced each day, yet the world uses about 93 million. Even with an OPEC slowdown to 700,000 barrels per day, and oversupply would still exist and continue to build (absent any demand reduction, of course).
Furthermore, other nations continue to increase production. The US, for example, doubled oil output since 2010. While production is currently not at an all-time peak (9.1 million barrels per day), it remains robust (8.5 million barrels per day). This high US production continues despite prices remaining comparatively low, providing reduced incentives to produce using higher-cost oil extraction methods. It was only a little more than two years ago when prices were over $100 per barrel, encouraging such production. Earlier this year (in February) prices plummeted to a 13-year low at $26 per barrel of West Texas Intermediate.
The ultimate answer from Algiers, however, remains unclear because the deal has not been clearly consummated. There are no specifics as to which OPEC nations would be required to cut production, by how much, for how long nor when the reduction would commence. Those are serious and significant questions that remain. It appears we will have to wait until the November OPEC meet in Vienna for other answers.
At the same time, it remains uncertain how much impact OPEC can have even if they do drop production. Not only will the US continue to produce, but Russia, Canada, Brazil and many others will do the same. OPEC clearly doesn’t have the might, or maybe the fight in them, they have had in the past. In fact, not since 2008 has there even been an OPEC production cap in place. Perhaps the most informing answer from Algiers, even if a cut didn’t produce a large or sustaining impact upon prices, is if OPEC can once again be a formidable and forward-acting coalition. It would send a signal that, perhaps, the band is back together and could regain some of their previously influential role.
What does all this mean here at home in the US? Well, for the foreseeable future it most likely foretells fairly low oil prices. Those translate to lower cost for consumers. Last year alone, each US driver saved $550 due to reduced oil prices. At a current average of $2.22 per gallon for regular gasoline across the nation, US consumers and businesses which rely upon not only fuel, but petroleum-based products, will continue to reap rewards. That’s a great answer from Algiers for the US economy.