Oil Prices Expected to Stay Low, Even with Saudi Arabia

The Petroleum Exporting Countries (OPEC), met on Friday in Vienna, as oil prices have been at $40 a barrel, a nearly five-year-low. In June 2014, the price was $114 a barrel.

As reported by NPR, the nations part of OPEC, are suffering from the low prices, but it noted that if Saudi Arabia, the so called de facto leader of OPEC, could raise prices, they cut their production. However, the Saudis would rather cooperate with the organization, than make a move that could help rival nations like Russia and Iran. Originally, the Saudis considered cutting production and letting the prices rise if they could secure a commitment by Russia and other OPEC countries, to do the same, which they refused.

Eulogio del Pino, the oil minister for Venezuela, spoke to CNBC and proposed a five percent cut in OPEC production because there was currently “over-production” which might have devastating results on oil prices. Some of the poorer OPEC member countries, like Algeria and Nigeria, also have called for a cut to production according to Jim Krane, an energy specialist at Rice University’s Baker Institute.

Oil is cheap today partly because of a decision made by the Saudis and other OPEC countries last year, and according to Jason Bordoff, director of Columbia University’s Center on Global Energy policy, there has been a massive increase in supplies because of shale oil production in the U.S.

“Production in the U.S. was growing over 1 million barrels per day per year, it was a huge growth, the largest multi-year growth of production of any country in history,” said Bordoff.

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Helima Croft, the chief Commodities strategist at RBC Capital Markets predicted that an increase in shale oil production in the U.S. could happen if the Saudis did cut production on Friday.

According to a CNN Money article titled “Iran’s hidden role in Saudi Arabia’s cheap oil stance,” Saudi Arabia has hurt other OPEC countries by keeping the supply of oil coming and pressuring prices further. Iran has aspirations to re-enter the global oil markets, after having sanctions placed on them for years and wants Saudi Arabia to slow down it’s production. However, Saudi Arabia isn’t keen on helping other OPEC countries, particularly Iran and this is according to David Kotok, a money manager, a primary driver for Saudi policy.

“If you’re Saudi Arabia, lower oil prices are the single strongest tool you have in economic war,” said Kotok.

It has been proven that Iran has 60 billion barrels of oil in the southwest region of the country and once sanctions are lifted, Iran wants to increase production by 500,000 barrels a day and another million more barrels by the end of 2016. It is estimated that Iran could make about $175 million a day in oil revenue, at current prices, but if oil prices rise to the $80 range, that revenue could be upwards of $350 million. On top of this, there are fears by the Saudis that additional money to Iran would give them more power.

Despite their worries, the Saudis still have 2.6 million barrels of spare oil a day capacity, that being more than twice the amount of oil it delivered on the market last summer. Around the same time they decided to purposefully crash the price of oil.

While Saudi Arabia has attempted to diversify it’s economy, oil accounts for 90 percent of earnings from exporting, 80 percent of government revenues and 40 percent of their Gross Domestic Product (GDP). Fortune.com mentioned that most of the country is a desert where humans aren’t meant to live.

“So it is safe to say that without oil, much of Saudi Arabia’s population would probably flee for greener pastures,” said Cyrus Sanati, the author of the article “Saudi Arabia Hangs Tough on Oil in Fight for its Future.”

And they will continue to fight as the years go on.

[Photo by Joe Raedle/Getty Images]