Member States of the Organization of Petroleum Exporting Countries (OPEC) agreed on 30/11/2016 to cut oil production for the first time in eight years, to 32.5 million barrels per day from its current level of 33.24 million; to re-stabilize the crude oil markets around the world, especially with approval of Saudi Arabia and Iran to reduce their production, in response to the decision of the Algiers conference 9/2016.
Qatar’s energy minister has announced (1) Mohammed Bin Saleh that the decision was taken unanimously by the organization, and Kuwait, Venezuela and Algeria will monitor the states’ compliance with the agreement, noting that there are anticipated meeting of the Organization on 25 / May / 2017 to review the agreement.
And Saudi Arabia pledged , which produces 3% of total OPEC production, to cut the output by 486 thousand barrels per day, which led to oil prices to jump nearly 9%, above the level of $ 50 a barrel for Brent crude.
The Saudi minister said his country is hoping to reduce production outside the “OPEC” by 600 thousand barrels per day, adding that his country would bear the burden of reducing a large amount of current production, and expected production for 2017 (2).
“The decision to reduce oil production recorded the rise of the US crude prices after prices had collapsed in the past two years, as Brent price rose by 8.4% to $ 51.3 a barrel, while US crude rose by 8.2% to $ 48.9 per barrel .
Crude oil Brent prices rose in the futures contracts at $ 3.76 to $ 50.14 a barrel registering the largest daily change in nine months, futures contracts of WTI US broker rose by $ 3.55 to $ 48.78 per barrel (3)
Qatari minister added that Russia, a non- member state of the “OPEC”, has pledged to cut its production by 300 thousand barrels per day, out of 10 million barrels, which is half the amount that the countries from outside the organization had been hoped to reduce it.
Iran welcomed the decision by its President, Hassan Rowhani, and it is scheduled to determine the output of about 3.975 million barrel . the Iranian side described the decision as “a positive development”, and in this context, one can not ignore the fact that Iran’s agreement to cut output led to a rise in the share price for oil producers in the United States by (20%) within one day, which was in favor of supporters of the elect –President Donald Trump.
As for Iraq, the second largest oil producer in the Organization, which is suffering huge financial pressure because of the war against al-State (Daesh), and the liberation of oil fields (Qayyarah & Hamrin), and the reconstruction of devastated provinces, and despite the lack of its opposition to the decision to cut, but Iraq finds it difficult to its application, as it did not commit like some member states and non-members to the Convention in 1986, and Iraq was relieved of the reduction commitment since 1991 because of wars and sanctions, and weak cash inventory due to lower oil prices
.The Iraqi Oil Minister Jabbar Laibi stressed the sharp decline in oil prices in late 2014 paralyzed the Iraqi economy, as sales of the GDP amounted to 60% and 90% of government revenues, and the IMF refered in 2011 that Iraq had spent 11% of GDP to support the electricity sector, which is divided in the energy field into two parts, namely: the central government and the government of Kurdistan regime.
And the Government of the regime is facing also financial problems, because salaries were not paid for several months, and exceeds the GDP of public expenditure rate of over 50%, and those problems have increased because of the war against the state regulation, and the influx of refugees from Syria and from inside Iraq into the region where it received 1, 8 million people out of 5.5 million of displaced people that means an average of 28% of the total number of its inhabitants and the impact on the local economy and public services for the region and the increase in debt that weighed on its budget which is estimated at US $ 20 billion, as it enters to the treasury of the region by 67% of oil revenues while the rest goes to pay off those debts, and among the creditors of the province are international oil companies, oil traders, and this is what makes the inability of the Kurdistan Regional Government to reduce the production of oil and sell it, even though the Baghdad government thought to freeze its production (4).
We conclude from the foregoing that Member States of OPEC are not committed to the production quotas and have been exceeded the production quotas established in the past, what makes observers to doubt to implement the decision to cut the current production, as the production quotas of both Iran and Iraq were at levels lower than what is sought by OPEC, and plans to produce it.
So will the agreed reduction be achieved, and what is the real mechanism of the implementation of OPEC and every Member State has exceeded to its production quotas established in the past routinely? This is a good reason to expect for the non-compliance (5), In 2014, the US dollar rose by 10% from its level at the beginning of decline in the value of oil, and members and non-members of OPEC were motivated to produce each barrel that enable them to get more of the US currency.
The decision by OPEC to reduce production, does it aims largely to show the unity of the decision of the Organization and to save the face, or it will be in front of a major crisis that may appear in the coming months when Trump will put forward a working paper for the oil sector and American energy?
Shatha Khalil
Translated by : Mudhaffar Alkusairi
Rawabet Center for Research and Strategic Studies