By Ramya Kannan
In keeping with the efforts undertaken by the Organization of Petroleum Exporting Countries (OPEC) to deal with the supply glut in crude oil, Iraq has agreed to reduce its oil supply substantially. This compliance highlights the potentially rising success of the attempt to boost crude oil prices. This is one of the steps taken to rebalance the market after years of low prices due to surplus supply.
With Iraqs compliance to achieve the target reduction at 98 percent, the total oil production of the country has come down to an average of 4.464 million barrels per day (bpd) in March. This indicates a fall by almost 300,000 bpd from the time when the targets for cuts were still not in place. Moreover, Iraqs average crude oil exports have declined from 4 million bpd in November 2016 to 3.756 million bpd in March 2017. However, even as Iraq embarks on the path to comply fully with the targeted reduction, it continues to garner resources to expand its production capacity and explore new reserves.
Steps towards rebalancing the market
Since Iraq is the second-largest producer of crude oil after Saudi Arabia, its compliance with the agreement indicates a surge in support for OPECs plans to deal with low crude oil prices. Following the accord to reduce oil supply that was signed in Vienna in November by 10 members, production by OPEC fell by 32.71 million bpd. Saudi Arabia has surpassed its targetted reduction, and Russia is expected to contribute to almost half of the combined reduction in output by the 11 non-OPEC countries which signed the deal. This is despite the fact that scepticism regarding the commitment of these countries persists. According to OPEC Secretary, General Mohammed Barkindo, a balanced market already seems to be in view.
Loopholes in the proposal
Though the goal to reduce oil supply to cause an unprecedented rise in prices does not seem out of reach anymore, it is questionable if the steps taken by the compliant countries will actually bear acceptable results. It is possible that the United States will use this opportunity to increase the domestic production of shale gas and crude oil in order to push exports, thereby providing substitutes in the market which will keep the prices low. This could potentially strengthen the United States position in the international oil market, coupled with a gradual decline in the worlds reliance on OPEC for crude oil.
It is important to recognize that enforcing a reduction in supply on OPEC member countries could adversely affect the smaller producers who rely on oil production for the sustenance of their economy. Apart from this, surging crude oil prices will become a cause for concern for countries that depend on imports. On the other hand, rising prices could spearhead the revival of various energy exploration projects.
While an increase in global crude oil prices may seem essential from the point of view of the largest producer and supplier of oil, the measures to bolster efforts to fulfil these commitments may backfire. The collaborative effort of OPEC members and supportive non-members may be the first step towards a highly profitable and exclusive oil regime. However, the presence of other suppliers like the United States ensures that the traditional centres of power and influence in the global oil market do not remain unthreatened.
References:
http://www.reuters.com/article/us-iraq-oil-opec-idUSKBN17406J
https://www.bloomberg.com/news/articles/2017-03-06/iraq-says-opec-will-likely-need-to-extend-oil-production-cuts
https://www.bloomberg.com/news/articles/2017-04-02/oil-stockpiles-dropping-in-sign-that-opec-output-cuts-working
https://www.eia.gov/finance/markets/crudeoil/supply-opec.php
https://www.oilfieldtechnology.com/special-reports/16032017/eiu-opec-members-show-unprecedented-level-of-compliance-with-production-cuts/
http://www.huffingtonpost.in/nanda-kumar-janardhanan/how-opecs-production-cut-will-impact-the-world-and-the-cartel/
https://www.theguardian.com/business/2016/apr/21/oversupplied-oil-market-rebalance-next-year-iea
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