Russia joins OPEC in throttling oil production — and oil prices keep rising

[Gas prices here are rising daily in my neck of the woods. And with Trump and his "Oil Cabinet" installed in January, watch for $4 per gallon gas prices returning soon. ---Bozo]

Brad Plumer · Monday, December 12, 2016, 6:35 pm

Many of the world’s biggest oil producers are trying to see if they can hike crude prices around the world by artificially throttling production. So far, they’ve been stunningly successful — with “so far” being the key term here.

On Monday, global oil prices surged to $55 per barrel, the highest level since mid-2015. The impetus? Russia and other countries just agreed to voluntarily cut their oil output, following a landmark deal in November by the Organization of Petroleum Exporting Countries (OPEC) — which includes Saudi Arabia, Iraq, and Iran — to limit production:

  (Nasdaq)
Both OPEC and non-OPEC oil producers are hoping that they’ll benefit from a coordinated production cut — that they’ll gain more revenue from the resulting higher prices than they lose in foregone output. One big question, however, is whether they can actually enforce this tricky agreement. It’s also unclear how US fracking companies will respond to this move; we might see a big resumption in US drilling that causes prices to slump yet again.

Why OPEC and non-OPEC countries are suddenly cutting production

A quick recap on how we got here: Ever since mid-2014, the world has been pumping out far more oil than anyone needs, due in part to the surprisingly resilient fracking boom in the United States and in part to slower-than-expected demand in places like China.

For much of that time, OPEC sat by and did nothing as prices fell. The cartel’s most important member, Saudi Arabia, actually thought it would be better to flood the global market with cheap crude in order to drive prices down and put all those high-cost US shale companies out of business. As a result, oil prices plummeted, at one point falling below $40 per barrel.

Two years later, however, Saudi officials are switching course. The country has been hurt badly by the price crash, having had to burn through more than $100 billion worth of foreign exchange reserves and cut social services and government salaries to compensate for lower oil revenues, threatening stability in the kingdom. Meanwhile, it’s partly achieved its goals: US production has fallen from 9.6 million barrels per day in 2015 down to 8.6 million barrels per day this year amid the price crash.

So this fall, Saudi Arabia and other OPEC countries decided it was time to rein in the global oil glut. In November, the cartel agreed to a major deal to limit oil production to 32.5 million barrels per day — down from its current levels of 33.7 million barrels of oil per day. (OPEC represents about one-third of the global market.) Saudi Arabia, Iraq, UAE, and Kuwait agreed to make the biggest cuts, which totaled 1.2 million barrels per day in all. Oil prices surged worldwide after the agreement.

But there was a catch: OPEC’s members said that as part of the deal, they wanted other non-OPEC oil producers, especially Russia, to make their own cuts worth 600,000 barrels per day. Over the weekend, the non-OPEC countries agreed to (mostly) do just that, signing on to cuts worth 558,000 barrels per day, with about half coming from Russia and another 200,000 bpd coming from Kazakhstan. Presumably, these countries all made a similar calculus — they have more to gain from cutting than from cheap oil.

Shortly after the non-OPEC deal, Saudi Arabia hinted that additional cuts might be in store down the road. So that’s what’s responsible for the current rally in oil prices. In the short term, it will mean more revenue for countries that export oil and shore up their budgets — but it will also mean higher gasoline and diesel prices for drivers in the United States and elsewhere.

Read more
http://www.vox.com/energy-and-environment/2016/12/12/13928584/oil-prices-non-opec-russia