OPEC Fizzles

Things just aren’t the way they used to be.

Four decades ago, King Faisal of Saudi Arabia snapped his fingers and nearly brought the West to its knees. It happened in 1973, right after he met with Egyptian president Anwar Sadat and they agreed to use their oil as a weapon.

It worked… a little too well.

I imagine my veteran readers can recall scenes like the one to the right.

The effects were catastrophic as oil prices surged threefold.

Faisal became Time’s Man of the Year a year later.

Oh, how the times have changed. OPEC’s power has diminished substantially since the 1970s, and the tables are quickly turning.

You could almost say the oil cartel is caught between a rock and a shale boom…

Up Against a Wall

The only weapon in OPEC’s arsenal is its ability to control the world’s oil supply. At present, the 12-member group produces around 30 million barrels per day, and that amount still accounts for roughly one-third of global supply. (I would also mention its control over global reserves, but dealing with OPEC’s reserves is already a shady ordeal.)

Now, whenever we talk about OPEC supply, what we’re really referring to is Saudi Arabia. We’re told that the Saudi Kingdom extracted 9.6 million barrels per day last month (slightly less than the 10 million barrels per day it produced during July).

The Saudis, however, have two serious problems ahead.

The first is that the dealer is rapidly turning into an addict.

It’s become clear that the Saudis are becoming more dependent on their own crude oil. The EIA recently reported that the country’s net electricity consumption has more than doubled since 2000:

This higher demand for electricity isn’t too surprising given that Saudi Arabia’s population will top more than 30 million this year. That number is projected to swell to more than 50 million by 2050.

More importantly, the alternatives just aren’t there for the world’s largest oil producer. It’s going to take it nearly two decades to double its generating capacity from both solar and nuclear.

Let’s hope the Saudis can just simply continue flushing billions of gallons seawater into the Ghawar oil field, which has officially become the world’s largest wishing well as of late.

And while we’re talking about OPEC supply, bear in mind that Saudi Arabia and the rest of the OPEC gang have a tough decision to make in the near future… one they wish they didn’t have to make.

To Cut or Not to Cut, That is the Question

If I were a betting man, I would bet the oil cartel will cut production (for now, we’ll assume we can trust its data, because you and I both know that cheating on production quotas has become a running joke inside OPEC).

Since June, oil prices in London have slid nearly 20%. No matter how you look at it, that’s going to hurt OPEC’s bottom line. And believe me, the absolute last thing OPEC members like Saudi Arabia want to do right now is cut the lucrative social programs that are sparing them from another Arab Spring.

Between rising consumption and making up production shortfalls from countries like Libya, OPEC has a lot on its plate for the November meeting, and the last thing these modern-day oil barons need is another thorn in their supply side.

Unfortunately, what they’re up against today is more like a brick wall.

I did mention that there were two issues that OPEC is facing.

The flood of tight oil in the U.S. has forced the cartel to look for new customers. We’re on pace to import less than 3.5 million barrels per day this year from OPEC countries. Put it this way: It’s been 26 years since imports from OPEC were that low.

Last year, one Saudi prince called the U.S. shale revolution a threat.

In 2015, they’ll consider it a full-blown crisis.

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

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