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Oil price-2016: Inefficient OPEC

Tuesday, November 3
Lifting the sanctions against Iran could increase the supply of Iranian oil to the world energy market by half a million barrels per day next year. This amount of Iranian oil supply will hold the world’s oil prices at the current low level. The International Monetary Fund (IMF) believes that Iran will increase its oil production (including condensate) by 20 percent to 3.7 million barrels per day in 2016.

Tehran is now actively promoting its new type of oil contracts, claiming that the Iranian energy market has adopted a new openness towards foreign investment.

US oil experts hardly believe Iran is able to strongly influence the world oil market in the near future, that is to increase production up to 4.2 million barrels per day. There are two reasons for their scepticism: no effective economic methods for enhanced oil recovery and weak oil infrastructure exist in Iran. Tehran needs a lot of investment to solve these two major issues.

"There is no one who really knows the world oil prices projection. Iran may be able to increase oil production by one million barrels per day only after few years," said a US expert who asked to remain anonymous.

It is obvious that no one can predict oil prices with absolute certainty but taking into account Iran, Russia and Saudi Arabia oil production increase, a lot of experts assume the oil price is going to be $58-60/barrel next year.

None of the experts nor oil ministers expect a sharp oil price recovery or harsh "back to the good old" $100/barrel within the nearest future. The current oil market situation leads experts to wonder about the necessity to maintain OPEC; OPEC hardly carries out its functions and barely protects the market from the rapid decline of oil prices.

An American economist who has decades of oil consultancy experience believes that OPEC's time is long gone, and there is no need for it today.

There are many OPEC member countries that carry out totally independent policies from OPEC since the cartel has been created. Since they have an independent policy from OPEC, it adds a lot of economic misunderstandings to the oil market forecast.

"OPEC declares one projected oil production figure but the physically produced oil amount is another number all-together. These things are never plain sailing with OPEC," the expert stated.

In fact, the strong independent policy of some OPEC members has led them to state budget deficits. Next year the IMF experts’ expectation of Iran, Algeria, Iraq, Saudi Arabia and the United Arab Emirates’ state budget’ will face deficit, taking into account the 2016 year oil price forecast at $60/barrel. Libya will face the worst budget deficit. IMF experts think Libya’s break-even oil price is $207/barrel. That is above and beyond the most optimistic wishful thinking. Oil at this price is a mirage in the sand.

The oil dependence reduction is the question of the hour , more than ever. Last September’s situation when the oil price has started to decline rapidly once more, reflected that neither OPEC nor anyone else can stabilize the prices as they wish. It is a true fact that the average Brent price since the beginning of 2015 is $54/barrel vs $98/barrel in 2014.

Trying to reduce its oil dependence, the United States is eyeing a few ways, some that are being are being developed right now, such as the increase in production of US shale oil and gas, as well as alternative energy development and energy storing.

“Most of the countries are increasing oil and gas imports but we are trying to bring it down. The US’s own shale gas production can make USA almost gas import independent,” said a US oil expert who works for a hydraulic fracturing company.

The United States has one of the world's largest technically recoverable 24 trillion cubic meters shale gas reserves.

Environmentalists, of course, have many claims that the hydraulic fracturing can contaminate water, air and soil. Green Peace argues that the social and environmental consequences of hydraulic fracturing negate the possibility of using hydraulic fracturing.

The president of Venezuela, Nicolas Maduro, said last year that shale oil production in the United States may lead to powerful earthquakes in the USA. It should be noted that technically recoverable shale gas reserves in Venezuela exceed 300 billion cubic meters. Since there is no definite answer as to whether hydraulic fracturing is as harmful as environmentalists claim, production remains ongoing. Curiously, 650 registered earthquakes in Oklahoma have actively produced oil via hydraulic fracturing.

"There are thousands of companies in the US that produce shale oil and gas. Believe me, they face a lot of environmental inspections during production," the hydraulic fracturing company expert said.

It is a well-known fact that the US local market is one of the largest energy consumers. At the same time, the US transport sector consumes up to 70 percent of oil. Electric cars are one of the ways out to reduce the oil and gas dependence. Indeed the electric vehicles have a really positive environment impact. On the one hand, the alternative energy market should develop; however, it leads to job cuts in the traditional energy market. Current low oil prices reduce the operational expenditures of oil companies which influence the job market after all. But the head of OPEC Abdullah el-Badri eyes the current situation positively. As he said recently "the oil industry's best days are yet to come”.