OPEC as First Victim of Price Wars

The possibility of uncontrolled oil production outside OPEC undermines all chances of price manipulation by this organization.

This week Iran has once again announced the reduction of prices for oil supplied to Asia-Pacific, which, according to analysts, is continuation of Tehran's price war against other oil-exporting countries. Danila Bochkarev, a fellow at the Brussels-based EastWest Institute, discussed in an interview with valdaiclub.com the consequences of this initiative in the context of the oil-producing countries' efforts to stabilize oil prices.

"The underpricing of oil by Iran is a typical attempt to enter new markets", Bochkarev said. "Iranian oil left the European market after the European Union joined the sanctions against Iran in 2012, and it was replaced by Russian or Saudi oil. As it tries to return to the traditional markets, Tehran is, of course, forced to cut prices to attract buyers. "

According to Bochkarev, this step is unlikely to shatter world oil prices. "Iran will sooner or later get its share of the market," he said. "It is unlikely that the price will rise to the previous level soon, because Saudi Arabian and Russian suppliers are also dumping. As the market is on the way to stabilization, this kind of games will probably continue this year, but probably not into the next year."

Amid price wars between oil-exporting countries, the question of OPEC's efficiency is being raised again. Thus, Igor Sechin, CEO of Rosneft, Russia's largest oil company, said recently that OPEC in practice died as a unified institution, and we should forget the times when it determined the functioning of the global oil market.

Bochkarev agrees with this assessment. "Firstly, it means irritation by the fact that OPEC ceased to be a viable organization. There are too many differences between OPEC member-states. Moreover, they do not have a common position. Secondly, this is a statement of real facts. Over the past years, the share of OPEC countries among oil producers really dropped. And there are two main reasons why this happened. First, big differences between OPEC members (while poorer countries are more interested in the revenues, states like Saudi Arabia and Kuwait focus on the market share). Second, the emergence of new oil producers and big progress in shale oil production," the expert said.

According to Bochkarev, the possibility of uncontrolled oil production outside OPEC undermines all chances of price manipulation by this organization. "We see that when prices are already above $50, this will automatically include any unconventional projects, primarily in North America, as well as other projects – deepwater, and so on. That is an alternative: crude oil production is not as cheap as it used to be, but there is a choice that reduces the possibility for OPEC to pressure on prices."

"We cannot say that this organization will be dissolved in the next two or three years, but it is clear that its role has been significantly reduced," the expert concluded.
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