An Iranian professor said Tuesday that the Organization of Petroleum Exporting Countries (OPEC) is doomed, because of power struggles between Iran and Saudi Arabia that have created serious political fallout.
“OPEC’s power is not waning — I’m sorry, OPEC is finished,” Hossein Askari, an Iranian professor of business at George Washington University who studies the oil industry, told USA Today. “OPEC is just powerless. They cannot agree to anything, both for political reasons and economic realities.”
Saudi Arabia has kept oil prices low to hurt Iran, causing prices to remain low since mid-2014. Iran hasn’t produced much oil recently after seriously investing in its oil sector for years due to sanctions. Simply restoring previous oil production levels is estimated to require a minimum $150 billion of new investment and could cost Iran up to $500 billion over the next five years, according to reports by the country’s state-run news agency. Iran desperately needs the kind of quick cash that only selling oil on the global market can provide.
Since Saudi Arabia refused to slash production at a critical OPEC meeting last November, the price of oil has plunged and is currently below $50 per barrel. These low prices and lack of coordination between the countries weakens OPEC’s power as a cartel.
Conflict between the major oil producers of Saudi Arabia and Iran is escalating, as the Saudis banned ships carrying Iranian crude oil from entering the country’s waters or utilizing its infrastructure in April. The ban has escalated the conflict between the countries and made Iran even more unwilling to cooperate. The Saudi’s have even threatened to increase production by up to a million barrels a day which would vastly lower the price of oil simply to hurt Iran.
So far, OPEC’s power is weakening because Russia has supported Iran’s position, likely to protect its political interests elsewhere. “Iran has a special situation as the country is at its lowest levels of production. So I think, it might be approached individually, with a separate solution,” Aleksander Novak, Russia’s energy minister, told the state media company Russia Today in March.
However, this will only work to a point. If the Saudis continue increasing oil production to keep the prices low, it could be devastating to Russia. Low oil prices caused the Russian economy to contract by 3.7 percent in 2015. Russia’s economy will keep shrinking unless oil prices recover to at least $80 per barrel, according to the Energy Research Institute of the Russian Academy of Sciences.
Saudi Arabia can increase production because it can likely handle cheap oil better than other OPEC countries, but even it is expecting a budget deficit of $140 billion — roughly 20 percent of the Saudi economy. When compared to 2013’s surplus of $48 billion, the fiscal outlook for the Kingdom looks so dire that the International Monetary Fund warned it could go through its fiscal reserves within five years. Saudi oil export revenues dropped 46 percent in just the last year and the country is selling bonds for the first time since 2007.
Saudi Arabia and Iran have a long-running rivalry, with its roots in religion. Saudi Arabia is a Sunni Islam country, whereas Iran is the home of Shia Islam. The two countries have been engaged in proxy power struggles over the last year, but the Saudi execution of a popular cleric in January immeasurably worsened diplomatic relations.
Cheap oil is good news for America and other net oil importers, especially for the poorest members of society who spend a larger proportion of their incomes buying oil products.
Posted by The Daily Caller.
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Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell