It’s perhaps worth noting that this type of statement may be aimed at an internal OPEC audience. As noted in the article and elsewhere, Saudi Arabia and its allies - which include Qatar - are facing pressure from poorer OPEC members to do something about falling oil prices, and this may be an attempt to deflect some of that pressure. Nonetheless, it seems in line with what a lot of independent analysts have also been saying.
So the question is why in fact the Russians won’t go along with OPEC? The question doesn’t apply to the US oil producers, since they’re independent private companies and don’t/can’t act in concert to try to influence prices. But as I understand it, the big Russian oil companies are largely controlled by the national government. So why wouldn’t it be in the interests of the Russian government to go along with a supply cut and double prices from where they currently are. Sure they (and OPEC) would lose market share to the US producers, but that wouldn’t cost them anything close to what they’re losing from prices being as low as this. And they can’t possibly be trying win a price war against OPEC (they’ve been helped by the recent slide in the value of the ruble, but Saudi Arabia and some of the other Middle Eastern oil countries are still far lower cost producers).
When have you seen Russia operate from any POV other than Us vs The World?
There is enough slack producer capacity now that Russia could reduce output to zero and the price wouldn’t move much except in markets like Euro-gas where there’s a lack of logistical capacity to bring in replacement stocks from elsewhere even though those stocks are readily purchasable at a good price.
Reducing supply to bump price works when you’re in the correct regions of the supply elasticity vs. demand elasticity surfaces. In the wrong regions, a supply cut is just a unilateral revenue cut. And if there’s one thing Russia (corporate or government, not that there’s much air gap between them) can’t stand much more of today, it’s a revenue cut.
The point is that it would seem to be very much in their self interest.
This would address the question if the question was: “why don’t the Russians make unilateral production cuts?”. But that’s not the question. The question is why don’t the Russians coordinate cuts with OPEC.
For example, suppose the Russians and OPEC could all make 20% cuts in production and bring the price back to $90/barrel from the current $45. Gross revenue for everyone involved would increase by 60% (= 2 x 80%) and net revenue would increase by a far greater percentage (since the increased revenue is pure profit).
The Russians work with De Beers to limit their sales of diamonds. They have a lot more diamonds than they put on the market. A lot. Sure they sell fewer of them, but the markup more than makes up for it.
This is not all that different from working with OPEC.
It could be for reasons of perceived national prestige. Putin may not want to be a member of any organization in which Russia won’t be the dominant member.
OK, so I asked my father this question. (He is a big time energy-stock investor and an all-purpose Very Smart Guy.)
His thinking is that it’s essentially a game of chicken. He says that OPEC has always wanted the Russians to either join or at least coordinate with them and the Russians have always refused. The reason they refused is because they never had to join - they could just refuse to cut production and have OPEC cut production instead, and in this way get all the price benefits of the cut without having to cut production themselves. What’s happening now is that OPEC and SA are calling their bluff. Let’s see what the Russians will do if OPEC won’t cut production and they (the Russians) have to sell oil at market rates. Meanwhile for their part the Russians are calling OPEC’s bluff. They won’t cut production and are gambling that SA and OPEC will eventually make a unilateral cut, as they always have. And now the question is who blinks first.
My father thinks that there’s a realistic chance that they do make some sort of deal at this point (though not probable enough that he wants to bet a large portion of his portfolio on it). Because the Russians are, as above, relatively high cost producers, and in particular their hopes for new sources of oil are largely in very high cost Arctic and offshore fields, which are completely uneconomical (for new investment) at today’s prices. Meanwhile, SA is blowing through their reserves. So they’re both being killed. Who knows?
The incentive to cheat on the cartel imposed limits is one of the weaknesses of all cartels. OPEC’s had issues with cheating
ON top of that, 3 of the top 5 oil producing countries in the world aren’t in OPEC - US, Canada, and China. The #10 producer, Mexico, is also not in OPEC and tied by NAFTA to Canada and the US. There’s some large but costly to extract deposits that can be tapped if price goes up too much. The ability of the cartel to push the upside is thus limited. Attempting to do it just opens up supply in some of the non-OPEC countries.
Russia has used energy as a tool in international relations. Both closing the tap, selling cheaply, and opening the taps wide are available as carrots and sticks now. Cartel limits potentially could restrict the potential effectiveness of the carrot techniques.
One other thing I don’t understand about the oil price predictions and commentary is the widespread assumption that possible bankruptcies of US oil producers and related companies plays into the picture somehow. (A lot of US oil companies are overburdened by debt due to acquisitions when oil was much higher, and the debt may not be sustainable at current oil price levels.) As I see it, bancruptcies have no impact at all on oil production. Oil is either profitable or not at a given price; if it’s profitable then it will be produced and if it’s not then it won’t. The only thing that changes in a bancruptcy is who produces (or doesn’t produce) it - the current company/shareholders or the purchasers/debtors. If it can’t be produced at a profit then even a company facing bankruptcy won’t produce it. But if it can be produced at a profit, just not at enough of a profit to pay the debt of a given company, then it will keep on being produced, by someone.
This is not to say that price cuts won’t temper production in the US. There are some fields which are high cost to run on an ongoing basis and these will be shut down the soonest. There are other fields which are profitable on an ongoing basis but are not profitable enough to recoup the initial “sunk costs” investments. In such cases, the existing fields in operation would keep going but new fields of this sort won’t be developed, so that over the long term production would drop off.
But it’s the bancruptcy angle specifically that I don’t get. (It’s to the point that some are saying OPEC is going to wait until the semi-annual bank LOC redeterminations - which typically take place in October and April - to decide what to do next. I don’t see how any of this has an impact, as above.)
Perhaps OPEC intended this as a warning to outsiders. It’s shown them that if they invest in oil production when prices are high, OPEC can force the prices down and ruin them. Having made their point, OPEC can avoid competition in future periods when prices rise again.
It also may be a sign that OPEC producers (notably SA) are in fact nearing peak production. They want to maximize revenue before their production starts declining. In addition, SA sees Iran as its new rival, both as an oil producer and as a military power. SA is buying tons of weapons, and has also promised to obtain nukes (if Iran builds them).
How will the cartel stand, when a bankrupt member (Venezuela-run by an ex-bus driver) decides to sell at below market? I cannot see the cartel lasting for long.
The volatility of the market is a disincentive to investors and lenders, making it more difficult to raise capital and harder to enter the market.
If a company goes bankrupt and out of business due to declining oil prices not covering production costs, one might suspect another company will just step in once prices are back up. However due to past oil price history and the possibility of it repeating the loan they get would be expected at a higher interest rate, if they can secure a loan at all, and fewer investors willing to risk money in such a venture knowing that all it takes is a intentional turning up the tap to intentionally kill this company, so less $ to offer per share, which makes sense as the company is likely to go bankrupt again if oil price goes to that level that the former company went bankrupt with, then all it’s worth is based on how much it can make in the few years it can be expected to operate.
That’s possible, but a lot of these articles seem to be saying that the bankruptcies themselves will decrease production. See e.g. this article as a typical example.
That’s backwards. If were facing imminent declines in production it would make more sense for them to cut back and maximize current revenue while stetching out their supply. The actions they’re taking are those of a country which has no fear of the supply running out.
Problem for countries like Venezuala is that there’s nowhere else for them to go.
They probably will. Other investors that might contemplate buying up a bankrupt oil production company will probably hesitate if they see they would face the same factors that drove the first company into bankruptcy.
If no one buys it, then the creditors of the first company will run it. Bottom line is that one way or another, if those properties can be run at a profit, then someone will.