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OPEC Member Asks for Production to Be Cut

Conventional wisdom would say that everyone in the oil patch is taking a mighty beating right now.

But some are hurting much more than others…

Indeed, while oil company shares have been plummeting, the eventual consequences of this engineered collapse will come home to roost at the doorstep of the perpetrators: OPEC.

The reason is simple…

While oil companies can be fairly nimble when problems arise, most countries don’t have a lot of flexibility. So they’re at risk of completely melting down.

And one country has already called for production to be cut, much earlier than anyone expected! Is this the beginning of an uprising?

Dissent Among the Ranks

Oil and gas companies have already begun to reduce spending going forward. Many are slashing budgets by double-digit percentages, which will allow them some maneuverability.

That’s because the key to surviving the energy crash, at least for the short term, is cash flow.

Now, if oil prices stay at or below current levels for more than a year or so, the picture could change dramatically with bankruptcy scenarios throughout the oil patch. You can only live on cash flow for so long. Earnings are what matter in the long run.

For countries, cash flow is also critical. Most OPEC countries run highly subsidized economies, and those subsidies are made possible entirely by revenue from energy sales.

Well, that revenue has just been cut in half. Shutting down wells is just not an option when there are hungry mouths to feed. And when those beneficiaries of the oil welfare state start thinking revolution… well, the situation becomes much worse.

Frankly, I thought it would take a few months before we heard about dissent within the ranks.

But just last week, Algeria, one of the smaller members, became the first to call on OPEC to cut production.

Youcef Yousfi, the Algerian Oil Minister, broke ranks and publicly petitioned OPEC to cut production to stabilize and raise prices.

You see, Algeria escaped the Arab Spring relatively unscathed by buying off the public with higher wages and promises of more subsidies for things like housing. When more than 97% of your hard-currency income and 60% of your budget are dependent on oil revenue, your $200 billion in reserves start to dwindle pretty fast.

The Algerians know this, and they’re scared of the potential social unrest that will accompany the crash in oil prices.

Subsidies account for a whopping 21% of the country’s economic output, and that may be a massive understatement, as more than 60% of the jobs in the country are somehow government related or subsidized.

This same scenario will play out in at least half a dozen OPEC countries before this is all said and done.

Keeping It Together

The Arab Spring may have sent a shockwave through the despotic establishments that run most OPEC nations. However, the collapse in oil prices might seal the deal, and that alone might be cause enough to spike prices higher.

OPEC is playing a losing hand, and while the richer Gulf States won’t sweat it financially for a while, the calls for cuts will grow steadily louder.

For OPEC to survive and remain relevant, it needs to hold together, and that’s reason enough to expect oil production to be cut eventually and prices to move higher, once again.

We may not see the $100-per-barrel price that T. Boone Pickens is predicting within 18 months, but we should see significantly higher prices in that time frame.

And “the chase” continues,

Karim Rahemtulla