Oil Cost Differences between OPEC Nations
This Bloomberg article point out something that I haven’t come across before regarding oil production:
``The divisions arise in OPEC because what countries need and want varies,’’ said Gareth Lewis-Davies, an oil analyst at Dresdner Kleinwort Group Ltd. in London. ``The Saudis are playing a long-term political game. Other countries have higher costs.’’Saudi Arabia needs oil prices of less than $30 a barrel to balance its government budget, according to Merrill Lynch & Co. estimates. The United Arab Emirates requires $40 a barrel and Qatar $55.
Iran, with double the population of Saudi Arabia, has a breakeven point of about $100 a barrel, according to Edward Morse, managing director and chief economist at Louis Capital Markets LP in New York. In Venezuela, where President Hugo Chavez’s government is spending oil revenue on social programs, the figure is about $120, he said.
Today oil is trading at $69 a barrel, down 52% from its high this past July. Given that the price is dropping at the same time an announcement is expected from OPEC cutting production by 2.5 million bbls/day – the output of Kuwait, it’s clear that investors believe that the recession in the US and oil consuming nations will boost supplies more than OPEC can cut them. It also shows an expectation that the OPEC nations will cheat, producing more than their OPEC quotas in an attempt to sell as much oil they can before the price falls even further. This is the exact opposite of the situation this past summer where rising prices made it lucrative for nations to pump as little as they could in order to sell oil later at higher prices.
By pointing out different production costs between OPEC nations the Bloomberg article explains the behavior the individual OPEC states. Saudi Arabia has been one of the few OPEC nations to recognize the long term costs of high oil prices. They show a heroin dealer’s acumen when it comes to addiction: make your product too expensive and you increase the incentive of your junkies to quit. Iran and Venezuela lack that knowledge – and given that their production costs are up to 4x that of the Saudi’s it’s clear why.
UPDATE: Here’s an article at the Economist with slightly different figures but roughly the same idea.
Leave a comment