LONDON: Uncertainty about how far world fuel demand and oil prices will fall has made it harder than ever for OPEC members to agree on how to balance group output policy against the divergent needs of their individual budgets.
Oil’s collapse from almost $150 a barrel last July cut OPEC earnings by $356 billion in six months and they could drop by a further 50 percent this year, the group’s Secretary-General Abdullah al-Badri said.
But in 2008, the Organization of the Petroleum Exporting Countries made about $1 trillion, some of which it squirreled away for leaner times.
With oil around $40, member countries can still turn a profit, especially as output costs have dropped.
“They’re all laughing now in terms of operating costs,” said Mike Wittner of Societe Generale. “But this isn’t about operating costs. It’s about funding the budget of the country.”
In a swift and collective supply response to oil’s rapid descent, OPEC has already agreed to remove 4.2 million barrels per day (bpd) to try to build a floor under prices.
To redress the fiscal balance, many members, such as Kuwait, Nigeria, Angola, Ecuador and some say Iran, have also cut their domestic spending in lock step with production.
Official figures are unavailable, but the various OPEC members have widely divergent requirements, with Qatar needing as little as $10 a barrel and Venezuela requiring 10 times as much, analysts have estimated. In terms of the narrow economics of getting their oil out of the ground, it costs less than $10 a barrel to pump in the Middle East and at least double that elsewhere.
In addition to spending billions on oil and gas projects, some OPEC members, especially those with big populations, have to contend with high social costs and ambitious public projects.
Venezuelan President Hugo Chavez’s lavish public spending plans require oil prices of around $100 and Iran needs roughly $90, in part because of its presidential election this year.
“For Iran and Venezuela, their main recourse is to draw down their accumulated reserves, but these are not as plentiful as in Gulf Cooperation Countries,” said David Kirsch of PFC Energy.
Even within the Arab Gulf states, Kuwait, which has a tiny population, revised its budget to include lower welfare and infrastructure investment.
Leading exporter Saudi Arabia has pledged to build “economic cities”, costing billions of dollars, designed to tackle chronic unemployment and over-reliance on oil. Analysts say it needs a price of about $50 to avoid deepening its foreign debt.
The desert kingdom has projected a deficit — its first in seven years — of $17.3bn in 2009.
Saudi has led the cuts, reducing its own output by 2 million bpd from a peak of an estimated 9.7 million bpd last August.
Its production has fallen well below its OPEC target, giving support to the oil market, but doing little to reduce its debt.
