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OPEC cuts oil production in new deal, privileges key players
 
 
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In an unprecedented step since the 2008 financial crisis, member states of the Organization of the Petroleum Exporting Countries (OPEC) decided to cut oil production in a meeting held on Wednesday in Vienna, in an attempt to increase global oil prices.

Total production by members of the organization exceeded 33.6 million barrels per day in October, to be reduced by 1.2 million barrels per day under the new deal.

The agreement, spearheaded by major players in the 13-member cartel of oil exporters, distributes losses among all OPEC members to ensure that key oil-producing states retain a certain margin of profit.

Saudi Energy Minister Khaled al-Falih, one of the most influential members in the deal, said that the agreement was first put forward last September in Algiers and has finally been adopted, capping OPEC oil production at 32.5 million barrels per day.

The agreement forces Saudi Arabia to make the biggest production cuts among all member states, from 10.544 million barrels per day in October to 10.058 million barrels in January 2017, when the deal is to be implemented. Despite this, the kingdom will continue to produce more oil than in 2014 — in June of that year, Saudi’s production reached 9.688 million barrels per day when oil prices began sliding sharply, leading to a market crash.

The success of the deal, following weeks of tense negotiations and months of failed attempts to control the market, lies in the compromise reached between two key political powers in the OPEC, but also two main rivals in the region: Saudi Arabia and Iran.

Saudi Arabia’s prior refusal to cut oil production unless Iran also agreed to reduce output has impeded continuous attempts to reach a deal since the beginning of the year.

Under the new agreement, Iran is the only state granted an increase in production, after its insistence on being allowed to recover from the effects of US sanctions and return to production levels from a decade ago. As such, Iran’s current oil production of 90,000 barrels will increase to 3.8 million barrels daily.

“Both Iran and Saudi Arabia have satisfied their egos … it seems there is an attempt to calm the situation. Still, the Saudi and Russian productions continue to record historical increases,” says Gaurav Sharma, an energy analyst at Forbes and International Business Times.

According to press statements by Saudi Energy Minister Falih outside OPEC headquarters on Wednesday, Russia is expected to join OPEC states and decrease production at a rate of 300,000 barrels daily, while other non-OPEC members will cut output to a total of an additional 300,000 barrels per day.

OPEC invited non-member oil producing countries to a meeting on December 9, which Doha offered to host. However, Mohamed al-Sada, Qatar’s energy minister and the current head of OPEC, stated that Qatar and OPEC are open to other suggestions regarding the meeting’s location.

It is expected that other non-member states will join the agreement next month, according to Falih, including Russia, Uzbekistan and Oman.

John Hall, director of Alfa, a company specializing in energy studies, believes that the decision does not save the market as much as it saves face for OPEC as a main player in the global oil industry, adding that the November 30 deal remains of no value without an endorsement by all oil-producing states in December’s meeting.

While both Saudi Arabia and Iran have managed to achieve their respective objectives through the deal, Iraq seems to have lost its battle with OPEC, which has agreed to use information provided by secondary sources to calculate production levels for different states.

OPEC depends on two sources of information: official reports provided by the state in question on levels of oil production and exports, as well as “secondary sources,” or information acquired by other bodies, namely the International Energy Agency but other multinationals as well, which usually report lower rates.

During negotiations, Iraq had previously hinted at its wish to be exempted from the use of lower production figures, given its reliance on oil revenues to finance its war against the Islamic State and control the country’s turbulent security situation.

Hall is skeptical of information released by both sources regarding production levels, indicating that a member of one of the delegations of OPEC told him, “We find difficulty dealing with figures presented by states as well as those provided by secondary sources. All of them are inaccurate.” Hall considers this to be a structural problem within OPEC, “since nobody, including the governments, is aware of the real figures.”

Sharma believes that Wednesday’s decision harms OPEC in the long run, because it drives the oil market into a vicious cycle of increased prices, a return of oil production by smaller producers, followed by supply that exceeds international demand, resulting in reduced prices and a drop in production once again.

Sharma expects oil prices during 2017 to range between US$50 and $55 a barrel, enough to create a margin of profit for established oil producers or those who extract oil using traditional forms. “This decision does not, of course, help the production of Brazilian oil from deep waters, for example, nor the production in the North Pole or the countries of North Africa,” he explains.

“Put simply, if your oil activities are actually productive, lying within the scope of operations, the decision would be good for you, even if the barrel price does not exceed US$50,” Sharma adds. “Otherwise, you are bound to lose.”

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