The Low-Cost OPEC Cycle: The Big Elephant in the Room

In 2015, oil demand growth, which surprised on the upside, was responsible for most of the adjustment in the oil market imbalance. In 2016, oil demand growth started slowing down and the baton of adjustment passed to non-OPEC supply, particularly US shale, which has declined sharply in recent months. So far, the OPEC cut feedback mechanism has been absent in this current downturn, and instead, Middle East-OPEC (led by Iraq and Saudi Arabia and joined recently by Iran) has been a major contributor to oil supply growth. This OPEC behaviour is fundamentally different from some of the previous cycles. This presentation given at the Bank of England analyses the various OPEC adjustment mechanisms in this low oil price environment; agreement on cuts, the investment-output mechanism, and the fiscal crisis-disruption mechanism. It is argued that these adjustment mechanisms are highly uncertain and the adjustment lags are different from those for high cost producers and US shale, hence their impacts on the oil market are very difficult to predict. The presentation also analyses the three phases of Saudi oil policy since the 2010 oil market recovery and questions whether there is a new phase in the making. The presentation concludes that Saudi oil policy is being shaped by multiple considerations; internal factors (limited diversification and high reliance on oil revenues); external factors (the nature of the shock hitting the oil market); and OPEC dynamics (the ability to reach and implement an agreement with other producers especially at times when many producers are seeking to increase their productive capacity). As these factors change and/or as new information about the shock becomes available, Saudi oil policy will also adapt. Potential shifts in Saudi oil policy and/or signals about these shifts will continue to shape oil market outcomes.

By: Bassam Fattouh

Latest Tweets from @OxfordEnergy

  • Building New Gas Transportation Infrastructure in the EU – what are the rules of the game?

    July 19th

  • OIES study on demand prospects for LNG as a marine transport fuel: As of May 2018, there were 122 LNG-fuelled ships…

    July 19th

  • OIES @thierry_bros quoted on Berlin gas talks between EU, Russia & Ukraine

    July 18th

Sign up for our Newsletter

Register your email address here and we will send you notification of new publications, comment, articles etc. automatically.