The world used to tremble whenever the Organization of Petroleum Exporting Countries (OPEC) met to discuss policy. They could set world oil prices on a whim and even throw a disfavored country into economic turmoil with an embargo. In recent years, the flattening world demand for oil coupled with a boom in U.S. production has rendered OPEC obsolete in many people’s eyes. On November 30, however, OPEC made a deal to limit production, and that sent oil prices sharply upward.
The deal was designed to ease an oversupply of world oil inventories, and it came as a bit of a surprise. The three largest producers in the group, Saudi Arabia, Iran, and Iraq, all had unique issues to deal with. Saudi Arabia is by far the largest producer in the group, while Iran is just now ramping up production after being released from sanctions and Iraq is recovering from years of war. In the end, all three agreed to cuts, with Iraq and Iran agreeing to cut a smaller proportion than many other countries and Saudi Arabia shouldering the heaviest load. In total, the group has pledged to reduce output by about 1.2 billion barrels per day starting in January 2017.
One wrinkle in the deal is that it appears to be contingent on “non-OPEC” producers agreeing to a cut. The American government has little ability to restrain its companies, even if it wanted to. Russia has reportedly offered to make only some smaller cuts. In the end this OPEC action may wind up being just a stimulus for U.S. shale producers, whose stocks went up on the announcement. OPEC’s power is still far from what it once was.
Very little electricity is generated from oil in the United States, but oil markets still have a big impact on utilities. In many parts of the world the price of natural gas is linked to crude oil prices, so generally higher oil prices mean higher natural gas prices. In the United States, that may not entirely be true as more oil drilling can lead to more natural gas production. Regardless of the outcome, it shows the volatility of fuel prices for natural gas generators compared to renewables. Often you can lock in great electricity prices by contracting directly with your utility at the right time. You can learn more by contacting the experts at EnergyCare.
