Why OPEC Might Be Prepared to Raise Oil Prices
Low oil prices are taking their toll on the U.S. energy industry, but the impact domestically pales in comparison to the effect on countries that rely on oil to balance their national budgets. OPEC countries like Nigeria, Venezuela and Iran are going to experience massive deficits in 2015 if oil prices don't rise, and they're increasing pressure on OPEC to rein in production in an effort to increase oil revenue.
Meanwhile, in an effort to regain control of the oil market, Saudi Arabia is trying to keep production high so as to lower prices and squeeze U.S. shale producers and countries like Russia that have expanded oil production over the past decade. However, if the price of oil doesn't rise soon, there will be at least $257 billion in lost revenue for OPEC, and with budget deficits growing, the oil market will pit nation against nation for the future of oil prices.
Why Everyone but Saudi Arabia Wants Higher Oil Prices
According to Bloomberg, 10 out of the 12 OPEC members will run a budget deficit this year, including an expected $38.6 billion deficit in Saudi Arabia. But Saudi Arabia has around $750 billion in foreign currency reserves to ease the blow, so it's willing to take a long view on oil. Smaller OPEC countries don't have the same luxury.
Nigeria could have a budget shortfall of as much 5 percent of GDP, which could be a funding gap of $21 billion over the next four years. That's one reason it is pushing hard for a cut in OPEC production.
Venezuela's budget deficit may reach a whopping 19 percent of GDP in 2014, and it owes $23 billion to partners like oil drillers and airlines, according to Ecoanalitica. With the country's currency spiraling out of control, low oil prices only make Venezuela's calls for an emergency OPEC meeting more urgent.
As budgets across OPEC are pummeled by the fall in oil prices, calls from the cartel to cut production in 2015 grow louder from within its ranks. Nigeria is the president of OPEC this year and has said an emergency meeting might be necessary before the regularly scheduled June meeting. Iran and Venezuela would certainly be on board with a production cut in 2015, and with hundreds of billions of dollars at stake, the calls will only get louder. But one voice trumps all in the oil market.
Saudi Arabia Is Playing the Long Game
While most OPEC countries are looking at short-term budget deficits and the threat these pose to their economies as a reason to cut production, Saudi Arabia is looking at its long-term place in the oil market as a reason to keep production high. In the last 30 years, OPEC's share of the global oil market has fallen from about 50 percent to about 30 percent, meaning the group holds less sway over price fluctuations. If members cut production and shale oil production increases, that share could drop to 25 percent or lower very quickly, and OPEC might be completely ineffective in controlling prices. Short-term, a production cut might be a good thing to do, but long-term, Saudi Arabia -- and OPEC -- would risk giving up control over the oil market.
Saudi Arabia wants to control the market because then it will be able to effectively set the price for oil in the future. Whether or not its strategy of squeezing the market this year works is anybody's guess, and even then, Saudi Arabia might have to wait years for its strategy to pay off. In the meantime, you're getting a discount at the pump.
How This Affects You at the Pump
The side effect of this bickering over oil prices is low gas prices for the American consumer. The U.S. Energy Information Administration predicts that the average consumer will save $550 on gasoline this year, but how long those savings will last is anyone's guess.
If Nigeria and other OPEC countries get their way, we'll be headed back toward $100 oil before the end of the year. But Saudi Arabia is the country to watch because it's the largest producer in OPEC and has shown no signs of letting up the price pressure on oil prices. What OPEC decides to do with oil production in 2015 could have a significant impact on your wallet and the economy as a whole. With the cartel's power players divided on where oil prices should be headed next and literally hundreds of billions of dollars at stake, the whole world should be watching what they do next.
Travis Hoium is a Motley Fool contributor. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's free report onone great stock to buy for 2015 and beyond.