OIL ministers at the Organization of the Petroleum Exporting Countries (Opec) agreed to cut production of crude for the first time in eight years on Wednesday, a move that may produce ripple effects from global financial markets to the US economy, and all the way to the corner gas station.
“I think it is a good day for the oil markets, it is a good day for the industry and…it should be a good day for the global economy,” Saudi Energy Minister Khalid al-Falih told reporters, after the announcement was made at Opec headquarters in Vienna, Austria. “I think, it will be a boost to global economic growth.”
Under the plan, the cartel will cut production by roughly 1.2 million barrels a day.
Opec’s dominant member, Saudi Arabia, will absorb the biggest hit by cutting about 500,000 barrels a day. The deal also extends to some non-Opec countries, such as Russia, which is slated to reduce production by 300,000 barrels a day.
But the agreement is a tenuous one. The long-standing rivalry between the Saudis and Iran, a country looking to boost its revenue from oil after years of international sanctions, nearly derailed Wednesday’s meeting and the agreement with non-Opec countries won’t be formally addressed until a meeting on
December 9.
Analysts at Barclays expressed skepticism about the deal, sending out a report, titled “Show Me the Cuts”, and describing its outlook as “too good
to be true.” Nonetheless, oil prices surged within moments of initial reports of a deal being struck.
At the close of trading on Wednesday, the price of Brent crude—the benchmark price for global oil—was up $4.09, finishing at $50.47 a barrel. West Texas Intermediate —the recognized price for most North American producers—closed at $49.44 a barrel, a one-day jump of $4.21.
The last time Opec countries cut production was in December 2008, when the price of Brent crude was trading at $40 a barrel. The projected cut comes as oil prices have experienced a sustained two-year slide.
In November 2014 Opec surprised energy analysts by keeping production levels high, instead of cutting supplies to bolster prices.
Prices plunged from more than $100 a barrel in the summer of 2014 to as low as $26 a barrel in February. The price drop has been good news for motorists, as gasoline prices have remained low, but it proved disastrous for many Opec countries that depend on oil revenue to keep their economies afloat.
North American producers also suffered, reversing the many of the gains they made in shale-oil formations in recent years, resulting in an estimated 200,000 layoffs and dozens of bankruptcies that affected the larger US economy.
“I would argue one of the reasons we have reported very sluggish economic growth over the last two years is because of the drop in the investment in oil and gas companies,” said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University. In California, for example, the number of active oil rigs plummeted from 44 in the fall of 2014 to just four earlier this year, according to the oil-field services company Baker Hughes. That’s the lowest number for the state since Baker Hughes began compiling figures in 1992.
The November rig count for the state stands at six. Opec controls about one-third of the world’s oil supply, and a number of energy analysts on Wednesday said they expect prices to reach the $55-to-$60-per- barrel range in fairly short order.
“Most of the shale guys would be very happy at 55-60,” Weinstein said. That’s because during the downturn, many US producers proved very resilient, finding cheaper and more efficient ways to extract oil and gas. MCT