Maintenance of OPEC Production Prompts Speculation of Motives

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Researched by Industrial Info Resources (Sugar Land, Texas)--The OPEC announcement on November 27 to maintain oil production levels is considered by most to be the spark that lit the flames of fear under the financial world and caused the price of oil to collapse. Speculation by major media outlets is that maintaining production levels, and thus lowering crude prices around the world, is aimed at pressuring U.S. and Canadian producers, who require a higher price point to be profitable.

However, the decrease in oil prices is a global phenomenon that impacts more than just North America, which casts doubt on whether the price decrease is aimed specifically at the U.S. and Canada. Furthermore, the lack of outrage by politicians in North America, as well as other affected countries, and the mollifying efforts of Oil Industry professionals in the U.S., may point to motives outside of simply pressuring OPEC's up-and-coming rivals in the West. These motives include simply flexing OPEC's muscles and stymieing the flow of funds to Islamic State (IS or ISIS) extremists.

Unlike Saudi Arabian crude oil, hydrocarbons that are being explored in the U.S. and Canada must be accessed using newer technology and more expensive methods. The breakeven price varies greatly, depending on the shale, but most have a breakeven price of about $80 per barrel, with many of the lowest being in the Eagle Ford and Permian Basin plays, some reaching below $50. By contrast, Saudi Arabian crude oil is accessed through conventional means, and has a much lower breakeven price, and so it can compete on this metric very easily. However, given the sizable investment in this unconventional oil in the U.S. shale plays and the Canadian Oil Sands, to the tune of $238 billion in Canada alone, according to Industrial Info data, OPEC has reason to eye North America as a serious competitor.

However, North America is not OPEC's only competitor. Russia also sits on large reserves of oil and gas, and has an even higher breakeven price. Coupled with the economic sanctions imposed on it, as well as its dependence on oil and gas sales, lowering oil prices would more drastically affect Russia's economy than that of the U.S., which has a more diversified economic portfolio. Lowering oil prices can cripple Russia, and make the U.S. and Canada think twice about investing more in oil and gas infrastructure. By showing that OPEC's announcements still have the power to do just that, OPEC reasserts itself as a formidable entity, while demonstrating the power that comes with controlling Middle Eastern and African crude oil.

This power derived from controlling oil is seen not only by recognized nation-states, but also by extremist groups. IS suspected to derive much of its income from oil sales. This internal revenue stream has kept the group afloat and provided it with the means to become a true menace in the region. With an oil-dependent extremist force on its border, and the world's leaders agreed that cutting off IS' funding is of high importance to neutralizing them, it is in OPEC's economic and security interests to help stop IS. While even oil-dependent nation-states may chafe or hurt with the drastically lowered oil prices, the smaller IS "nation" is surely more impacted. Lowering the price of oil acts as a sort of chemotherapy, negatively impacting all affected, but aimed at making the environment too hostile for the less stable, cancerous entity to survive at all.

If lowering oil prices was a purely economic move, outspoken nations, such as the U.S. or Iran, would surely have cried outrage. While many media outlets in the U.S. have pushed the angle that this is a move to counter rivals in the Oil Industry, the outcry from politicians and world leaders is almost nil. Iran recently released a statement saying that it supports OPEC's decision, despite the crippling effect that such low oil prices have on its economy.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.