The rest of 2017 is shaping up to be an interesting fight between U.S shale oil producers and OPEC member nations.
At a meeting in St. Petersburg, the members of the oil cartel began talks of a more introspective, Intra-organizational approach to dealing with consistently low oil prices spurred on by a global supply glut. Already the Organization has made a pledge to cut its oil production by about 2% through March 2018. The meeting in St. Petersburg had more to do with the phenomenon that many countries were not curbing their output by the amount that they had originally committed.
According to Benoit Faucon of The Wall Street Journal, Ecuador even made a public statement that it would not cut its production by their committed amount because the country needed the revenue. Even larger producers, like Saudi Arabia, did well at first but have been ramping up production to meet increased summer demand. Total OPEC output has increased in recent months, and U.S shale oil producers show no signs of stopping their increased production, especially since they can drill at lower prices compared to their international counterparts. The meeting’s conclusion prompted an uptick in oil prices as big producers that were previously left out of the output-cutting agreement, like Libya and Nigeria, signaled that they would begin to cut their production.
The goal, for now, appears to be trying to pull prices up to around $60 a barrel.
In large part, these production cuts are aimed at alleviating some of the adverse effects that low prices are having on producers of crude. Christiane Baumeister, an assistant professor of Economics at the University of Notre Dame, said in a Wall Street Journal Report that, even though consumers may benefit from a drop in prices, the industry as a whole suffers when there is an overabundance of supply. She finalizes these claims by saying that, since the oil industry is a large part of the American economy, there is no tangible effect on American economic growth, especially since the global economy continues to slow down. Stephen Moore, an economist at Freedom Works, remains more optimistic and touts the continually lowered gasoline prices as a “stimulus” plan, and that, so long as the economy remains stable, this is a good thing.
As for the U.S, the continual decline in oil prices has contributed to a sizable decrease in gas prices, which means that consumers now have more disposable income to spend on whatever they see fit, although it is important to note that lower crude prices don’t always translate into lower gasoline prices. However, as Baumeister notes in a longer piece published by the Brookings Institute, investment in oil and gas in the U.S has declined substantially. Finally, many industries that are highly dependent on oil as an input may be enjoying the lower prices, but the overall economic effect of this is unclear.
Only time will tell us how markets will react to OPEC’s firming on their pledge to cut their oil production. The only question now is if U.S producers will match the cuts with increases of their own.
“OPEC Extends Oil Output Cuts but Glut Fears Persist” (The Wall Street Journal – Summer Said, Benoit Faucon, Sarah McFarlane)
“Reaction: Oil prices rallied as Nigeria agreed to cap crude production” (CNBC – Luke Graham, David Reid)
“OPEC Grapples With Growing Threats to Oil Deal” (The Wall Street Journal – Georgi Kantchev, Benoit Faucon)
“Are Low Oil Prices Good for the Economy?” (Stephen Moore, Christiane Baumeister)