Oil Plunges Below $40 on OPEC Infighting

The price of oil saw the bottom fall out this week. The cost of a barrel of crude fell to $35 from above $40, the biggest drop we’ve seen since the summer. There are a few reasons behind the fall in the price of oil, but the largest one seems to be a new conflict within OPEC itself.

OPEC, the cartel created by oil-rich countries in order to control prices, has been having a major internal dispute lately.The problem stems from Saudi Arabia’s policy of unlimited production, which it started pursuing in an attempt to get other producers to cut their supply.

This has driven prices into the basement, and made it so the only countries who can really compete are those with easy access to their oil.
Below $35 per barrel even offshore drilling starts to become less profitable, let alone the sort of refining and acquisition that needs to take place to make oil out of tar sands.

And it’s exactly those countries who refine tar sands -- like Canada and the USA -- that are the target of this new policy. The thinking in Saudi Arabia is that, as other countries are being driven broke by falling oil prices, there will be a large pocket of demand that opens. Saudi Arabia and OPEC in general are well-positioned to capitalize on that demand.

The strategy seems to be largely working. There have been layoffs in the Dakota oil fields, and Canadian oil is slowing down. Other countries are cutting their supply due to the falling prices, and more nations are importing their oil this year than last. All of that adds up to a win for the cartel, or at least it would if the policy wasn’t also hurting member states.

Saudi Arabian oil is some of the easiest to access and pump in the entire world. Other OPEC states don’t have it so good, and it costs more to retrieve oil in their borders. Often, they rely on oil in the Persian Gulf, which needs to be pumped from under hundreds of feet of water. In Saudi Arabia, the oil is right under the shifting sands, with plenty of infrastructure already in place to capitalize on its easy availability.

Other OPEC member states have protested Saudi Arabia’s unilateral move toward higher production even at lower prices. They’re being hurt by the policy just as much as non-OPEC producers. Still, it doesn’t look like Saudi Arabia will stop anytime soon. Even though oil prices are down in the short-term, in the long-term the future looks bright for OPEC oil.
Published on Dec 12, 2015
By Aaron Phillips
Aaron Phillips is a financial researcher and journalist based out of Michigan. He regularly writes the IG Daily and IG Weekly columns.

Copyrighted 2020. Content published with author's permission.

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