Revisiting OPEC's 30 million Barrels Per-Day Ceiling

In late November 2014, The Organization of the Petroleum Exporting Countries (OPEC) met in Vienna and agreed to retain a ceiling of 30 million barrels per day. OPEC, which supplies about 40 percent of the world’s oil, chose the strategy in an attempt to counter falling crude prices. Falling prices are due to a combination of an increase in U.S. shale oil production and weaker growth in China and Europe; as a result, crude oil prices have fallen 30 percent since June. The decision to maintain the same level of output while prices continue to fall reflects a dramatic shift in strategy for OPEC. The meeting in Vienna divided the 12 OPEC members into two factions: OPEC’s Gulf state members and poorer members such as Venezuela, Iran, and Algeria. Gulf state members were primarily concerned with maintaining OPEC’s market share of oil. Allowing the price of oil to continue falling causes shale oil production to become less economical. If OPEC is able to

sustain this strategy, it could succeed in limiting long-term shale production. Leaders such as Saudi Arabia’s oil minister Ali al-Naimi ardently supports the strategy and attempted to reassure other members that prices would rise again in the long run.

However, poorer members remained unconvinced that maintaining the same level of production at 30 million was in their best interest. Instead, they supported reducing collective output to halt falling prices. For these members, oil prices must remain above $80 or even $100 dollars a barrel to balance their government budgets. The day after the latest OPEC consensus, prices hit a four-year low below $72 per barrel, and at the current prices, only Qatar and Kuwait will be able to balance their budgets this year. This marks a dramatic shift for states who have become accustomed to oil prices typically above $100 a barrel since early 2011. Iran’s Oil Minister Bijan Namdar Zanganeh argued, “If you want to increase your share, you have to reduce prices, but you can’t do it through ‘shock therapy’ over the course of three months if you want to change everything.”

The dispute between OPEC’s members caused this meeting in November to last longer than usual; however, the ultimate decision was to follow Saudi Arabia’s lead. Saudi Arabia is the group’s largest producer and holds a third of OPEC’s total production. Ali Al-Naimi cited the increase in U.S. oil shale production to justify the move, yet the immediate effects of the decision may benefit the United States and other oil import nations.

U.S. oil production has risen to its highest level in 30 years thanks to the boom in fracking for shale oil. OPEC’s decision has caused U.S. benchmark West Texas Intermediate to decline 10 percent. Nevertheless, the drop in prices has its benefits as well for the U.S. and other developed countries, as it helps consumers in the holiday shopping season and reduces costs for an array of U.S. manufacturers, farmers and businesses. In Europe, the drop should improve the consumer spending. This is good news for the eurozone, which continues to suffer from a slow economy and particularly high unemployment. Oil-importing emerging countries in Asia like India will also benefit from the oil price cut.

The decision will have negative impacts on the OPEC countries themselves and other oil producers. Naturally, the fall in prices is hitting large and small oil companies around the globe although OPEC’s main target was the U.S. shale industry. The currencies of major oil producing countries declined; the Russian ruble hit a record low against the euro. For Russia, the decision exacerbates the slowdown in its economy, which already suffers from Western sanctions imposed in response to the situation in Ukraine. Iran, too, will add falling oil prices to its economic woes amidst U.S. and European Union sanctions over its nuclear program. Share prices of European oil companies such as Royal Dutch Shell PLC, and BP have already fell following the decision.

The long-term impacts of OPEC’s strategy remain to be seen; in addition, the strategy itself may be difficult to fully implement. OPEC has had difficulty enforcing its production limit in the past. Its production last year through October averaged 30.1 million barrels a day despite the 30 million barrel limit. Regardless, the decision has and will have an immense impact on the global economy.