Is OPEC Playing Mind Games With Global Oil Prices?

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By Jacob Maslow

Oil pipeline in the desert of Bahrain. Middle EastOPEC can seem like a very united organization, but don’t let appearances fool you. You have to understand that OPEC is dominated by Saudi Arabia, which is responsible for the bulk of its output. The rest of OPEC’s oil production capacity is shared among smaller members. In the Arabian peninsula and the Middle East in general, the cost of getting oil out of the ground is way cheaper than say in Nigeria, Mexico, Indonesia, or Venezuela.

From this perspective, OPEC is actually two organizations. One organization is for low-cost oil producers like Saudi Arabia. The other organization is for politically unstable and highly sensitive countries like Iran, Nigeria, and Venezuela. You have to keep this background in mind when trying to figure out the signals OPEC has been sending out lately.

One particularly telling remark out of OPEC is the Kuwait oil minister’s remark that OPEC is not lucky oil prices did not drop to $20. This is a psychological stab at the perceived fact that US shale oil is unsustainable below a certain price mark. It appears that Saudi Arabia and the powers that be behind OPEC are playing a guessing game as to when US shale will fold. It looks like they would have to wait for a while. It appears that the more marginal players in the US shale oil industry are collapsing. However, this only tells a partial picture.

The big picture to keep in mind is the great American oil production paradox. The more oil rigs are decommissioned, the higher the volume of oil is produced by the remaining rigs. This is probably very frustrating for Saudi Arabia, but it tells a more complete picture of the global state of oil’s health. The key to boosting oil prices is not production or lack of production. The key is restoring global demand.

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