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OPEC Has a Crippling Problem: Its Members Can’t Stop Pumping

7/30/17
from The Wall Street Journal,
7/30/17:

Eight months after a landmark deal to cut oil output to force prices up, big budget obligations drive members to keep producing.

OPEC, the once powerful oil cartel, is struggling to hold the line in a make-or-break fight to limit oil production, prop up crippling low prices and prove its relevance. Why? Its members are addicted to oil. Eight months after the Organization of the Petroleum Exporting Countries announced a plan for its 14 members and 10 allied countries to withhold almost 2% of the world’s oil every day to boost prices, seven of the 11 OPEC members that pledged to cut appear to be producing more oil than promised. Crude prices have actually fallen, by 7.6% to $52.52 a barrel, since the beginning of the year—half what the cartel called a fair price just three years ago and a level that some say is here for the long term. Previously, low production costs meant OPEC members profited even when oil prices fell. These days, members have ramped up government spending to keep populations happy and cover military expenses, and don’t have a cushion to let oil revenues slip. Their strained budgets can be covered only through increasingly high prices per barrel, and if prices are low they need to produce more. The inability to control output poses a potentially existential threat to OPEC’s influence. The longer prices remain low, said Helima Croft, the global head of commodity strategy at RBC Capital Markets and a longtime watcher of the cartel, “the harder it is to make the case to the most cash-strapped producers that they are ‘better together.’ ”

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