Question

Research the recent OPEC agreement on 11/30/16. Discuss what OPEC was trying to accomplish. What factors may make their production cuts more or less successful. In your view, what effect has increased US shale oil production had on the OPEC cartel? Professor gave a reference article as: https://www.bloomberg.com/news/articles/2016-11-30/opec-said-to-agree-oil-production-cuts-as-saudis-soften-on-iran

Answer 1

I will first start by explaining what OPEC is?

The Organization of Petroleum Exporting Countries was founded in Baghdad, Iran in the 1960, by signing an agreement with five countries namely Iran, Iraq, Saudi Arabia, venezuela and Kuwait. Their major goal is to unify the policies and cordinate among the member countries so as to ensure stability in the oil markets in order to have an efficient, economic and regular supply of petroleum to consuemers and a steady income source for the producers and returns to the investors.

In the agreement of 11/30/2016, the OPEC reached a deal with 14 of its member countries so as to bar the production of oil for the first time in 2008 from about 34 million to roughly about 32 million so as to increase the prices. The oil prices have fallen more than 50% since 2014 due to over supply of oil and booming United States shale production.

The US production has tremendously fallen from 9.6 million barrels per day to 8.6 b/d due to the price crash and about 1 trillion investment has dried in the market. Further Iran only returned back to the oil market post the lifting on the European Union and US sanctions after the nuclear deal. US has spent about 100 billion of the foreign exchange reserves and has cut down on alll social service programes and government salaries to compensate for the stability.

The uncertainty in the US shale production is a game changer for OPEC, with a price rise to $60, a large amount of oil can come back and this will be a major problem for OPEC. they would be unable to manage the oil market. The US shale drillers have flooded the market adn caused the prices to swing dynamically.

References:

https://www.bloomberg.com/news/articles/2016-11-30/opec-said-to-agree-oil-production-cuts-as-saudis-soften-on-iran

https://www.usatoday.com/money/

https://www.imf.org/external/pubs/ft/wp/2016/wp16131.pdf