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OPEC is Now in the “Danger Zone” – Just as Arab Spring II is Coming…

by | published August 23rd, 2016

For years my “day job” was being a university professor in political science and international economics. I’d often speak on the subject of “failed states” – countries in which the government had become so weak, while the economic and social problems grew so strong, that governance was no longer possible.

The danger then – and now – was from the power vacuum created by the absence of any real ability for central decision-making. Decades ago, the problem of failed states was a fixture in Cold War thinking.

But over the past several years, the topic has become relevant for a different reason: it’s now a chief concern in the fight against terrorist groups. The lack of any leadership is an enticing invitation for other groups to take over.

Today, for the first time, we’re seeing the two previously separate spheres of collapsing governments and states with (apparent) raw mineral wealth merge.

Specifically, failed states are now members of the OPEC oil cartel.

The impact of this is going be extremely serious, and will be felt globally…

Saudi Arabia has Split OPEC Down the Middle

As crude oil prices continue to yo-yo in a narrow range between $45 and $50 a barrel, something disconcerting is developing within OPEC. This has more to do with the unraveling of domestic authority than it does with the international price for oil.

The cartel is rapidly dividing itself into its own version of the “haves” and the “have-nots.”  Unfortunately, this doesn’t happen in a vacuum. With the split almost irreversible already, the future of OPEC is colliding head-on with the realities of the market.

Lurking in the shadows is another onslaught of violence and attempts at regime change.

All fourteen OPEC members are busy revising their national budgets, readjusting expenditures and raising taxes. All of this flows from the November 27, 2014 (yes, it happened on Thanksgiving) OPEC decision to hold the line on production, despite increasing U.S. shale oil output.

That meant sacrificing price for what the cartel hoped would be protected market share.

However, almost immediately, the “haves” in the cartel – Saudi Arabia, the United Arab Emirates, and Kuwait – effectively began taking market share from the rest of OPEC.

Perhaps they intended it as a short-term exercise to show the rest of the world who’s boss. Unfortunately, we are now 21 months into the process and everyone is still waiting for Saudi Arabia to blink.

Driving prices down made it so that nations that had tied their economic stability to the sale of a raw material (“rentier nations” in the pure sense) suddenly found themselves unable to pay bills or set their domestic agenda.

In fact, this was never really about OPEC as a whole retaining market share…

Saudi Arabia is Now Competing with the Rest of OPEC – and Winning

Instead, keeping up production was about the top three members (the “haves”) in general, and Saudi Arabia in particular, gaining a greater slice of a diminishing pie.

When it became clear that maintaining production would give way to expanding sales, the OPEC monthly quota system was shelved. In the past, the cartel had followed a monthly routine of: (1) determining global demand; (2) subtracting non-OPEC production; (3) calculating the resulting “call on OPEC;” and (4) dividing that call into quotas for each member.

But now, the quotas were suspended and a free-for-all replaced them.

At that point – with prices continuing to drift down – two facts became clear to everyone in the oil business. First, there was no longer any justification to keep oil in the ground.

In the past, withholding from pumping up oil had maintained a price floor, guaranteeing higher profits on whatever one did pump today – and in the future. That was no longer the case. Remember, the fight now is about market share, not about price.

Second, in this environment, improving market share can come (almost) only at the expense of somebody else’s market share. Now, as global demand continues to rise this is not quite a zero-sum gain.

But it’s close. As other OPEC members ramped up production in an increasingly desperate pursuit of declining revenues from more sales, Saudi Arabia opened up the flood gates of new oil unto the market.

That made the plight of “lesser” OPEC countries even more desperate, bringing us back to the problem of failed states.

Several OPEC Members Are Now Failed States

OPEC-member Venezuela is, by every indication, well on its way to becoming a failed state. In this case, this has been “accomplished” without the presence a civil war or any significant domestic terrorist movements.

Libya, on the other hand, already is a failed state. There, a civil war has rendered the central authority unable to govern. Meanwhile, in Nigeria a major terrorist insurrection in the north coupled with serious popular uprisings in the oil-rich Niger Delta has paralyzed the central government.

Angola and Ecuador, while both experiencing political paralysis resulting from ongoing economic problems, are still not failed states. But they are weakening.

Similarly, Iraq’s government is having more and more difficulty in keeping control of – both as a result of its ongoing conflict with Daesh (the regional, derogatory term for the self-proclaimed “ISIS”) and the intensifying sectarian animosity between Sunnis, Shiites, and Kurds.

And Saudi Arabia’s main competitor inside OPEC isn’t much better off…

Arab Spring II is Coming – and OPEC is in Dire Straits

As for Iran, its economy remains in shambles even as it attempts to use post-sanction oil sales as a way of clawing back. Of course, low oil prices make this even harder.

There are also signs that both Iran’s bad field conditions and its many infrastructure deficiencies block any hope of reaching the country’s ambitious production goals.

In fact, this morning rumors came out that Tehran is interested in discussing an oil production cap – another sign of the country’s internal mess. There is, after all, no likelihood of any “breakthrough” emerging next month at the biannual session of the International Energy Forum in Algiers.

But the stage may be set for a Saudi-led move in that direction later this year. I’ll have more to say on this in a few weeks.

In the meantime, here is the most acute problem for this split between the “haves” and the “have-nots” in OPEC: Arab Spring II is approaching.

Now, we’ve talked about this before here in Oil & Energy Investor.

During the first Arab Spring in 2010-2012, governments in the Middle East and North Africa (MENA) “bought off” popular unrest. Social programs and grants were significantly increased.

The countries that didn’t, or were too slow, collapsed.

The same situation hit in Venezuela, where the Prado unrest mirrored what was happening in MENA nations. Back then, OPEC nations had the luxury of high oil prices to subsidize the massive domestic spending binge. They bought time by spending more of their oil export revenue flows.

Not this time.

With low oil prices and weakened governments, OPEC is bracing for a much more protracted Arab Spring II.

This one is going to get ugly. Even the Saudi push to rein in production towards the end of the year (rather than soon, in Algiers) will be too little, too late.

This will have huge implications for the region and for global energy markets. I’ll be following this closely right here in Oil & Energy Investor.

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  1. August 24th, 2016 at 09:09 | #1

    Not be afraid!Russia and Eurasia group, keep calm situation!In another words i like very much this site for holistic think!Thank you!

  2. Robert in Vancouver
    August 24th, 2016 at 16:01 | #2

    The USA could almost ignore the middle east if they did one simple thing. Make a 100 year deal to buy enough of Canada’s oil to top up US oil production so the USA would never need to buy oil from OPEC countries again. But this would require building cross-border pipelines that the USA refuses to approve for reasons that defy logic and reason.

  3. Chazz
    August 24th, 2016 at 18:43 | #3

    I think there is potential for massive profits from the oil industry as they go greener and cleaner

  4. Anthony Guastella
    August 24th, 2016 at 21:05 | #4

    Thanks for this in depth explanation of what has kept oil prices down. But I was expecting a pay off for reading this article such as
    how to invest.

  5. bharat
    August 25th, 2016 at 03:12 | #5

    There is alternate energy source frpm sand and Lso new technology from solar..which are free..big names have invested huge sum in this field..in this scenario why should pri ce of oil rise?

  6. Tom Holmes
    August 25th, 2016 at 07:50 | #6

    So – how would a $100k investment become $200k, thru whom & when? Thanks for your hard work here!

  7. August 27th, 2016 at 13:49 | #7

    It really amazes me how many people engage themselves in “rearranging the deck chairs on the Titanic while totally IGNORING the causes of WHY the ship of state is going under.

    The fundamental problem is totally swept under the rug. The downward spiral began with passing of the Federal Reserve Act of 1913 which gave the International Banking Families like the Rothschilds and Rockefellers and their cronies a MONOPOLY on in effect legalizing what amounts to COUNTERFEIT money requiring the payment of interest in perpetuity. Banker propaganda has the masses falsely believing that bankers merely act as lender-borrower go-betweens for a small fee!
    They perpetuate the fiction that bankers make their money on the small difference between the paltry interest they pay depositors and the higher interest they charge for loans to borrowers needing capital to build companies and create jobs, plus of course consumer lending that creates new successive bubbles in real estate, student loan debt and now sub par car loans to get more people to buy new cars they can’t afford on conventional terms.. The outright lie is that they retain 10% of deposits as RESERVES and loan out the other 90% at a higher rate thereby earning a profit.
    NOTHING COULD BE FURTHER FROM THE TRUTH, no wonder Henry Ford once stated that if the masses truly understood how fractional reserve banking really works there would be a revolution in the morning with riots in the streets, or words to that effect.

    The only politician that has really been willing to stand up against this banker scam is former Congressman Ron Paul and the few who, based on his heroic efforts over decades have supported bills to abolish the FED and return to honest constitutional money with intrinsic value. The U.S. is the king pin here, essentially all nations have followed the U.S. blueprint of debt based Central Banking. As long as our needed currency supply, (essential to facilitate trade) needs to be borrowed into existence as DEBT no amount of tinkering, interest rate manipulation and jaw boning by politicians will save us from drowning in debt.

    The facts were well stated by an honest Canadian Central Banker (almost ab oxymoron) when Graham Towers in 1939 stated in sworn testimony before a Parliamentary Banking Committee that,’every Bank Loan is a NEW creation of money, and when it is paid back it ceases to exist” so what naturally follows from that, since the interest is never created, (only the original principle) there must be a constant increase in total loans contracted that not only replaces old loans paid back, but also the accumulated interest. It should be obvious from this that it is a recipe for PERPETUAL DEBT that grows from generation to generation.

    This Ponzi scheme is now in its final stages before a TOTAL COLLAPSE as even at nominal interest rates the debt can no longer be serviced. We need a RESET, a biblical Jubilee where all debts are wiped out and we have a new beginning with honest constitutional money that holds its value rather than being constantly eroded by inflation. The insane part is that the imbeciles or con artists, take your pick, who control this FRAUD are striving for even more inflation and bigger doses of what has already been proven NOT to work with more “extend and pretend” tactics like negative interest rates and “helicopter money” that has reduced our once strong dollar from a defined value of specific grams of gold or silver with intrinsic value to a pitiful 2-3 cents in purchasing power depending on whose statistics you trust.

    Bankers and the politicians whose candidacy they finance (the proverbial one percent) are the only ones benefiting from the present crony capitalism practiced to-day which is why Donald Trump is perceived to be such a threat to the entrenched establishment which is why they support Hilary Clinton because they know she can be bought and will cater to any special interests if they donate enough to the Clinton Foundation.

    NEVER believe anything politicians say, just what they actually DO!. The record of BOTH old line parties is pretty pathetic. No matter who has been in power,the fact remains that BOTH have contributed to the growth of a pyramid of debt that can never be repaid in sound money as long as we allow International Bankers to impose their debt creating Central Banking fractional reserve fiat system on dumbed down voters by promising the moon with no plan for payment.

  8. Dale G. Moore
    August 30th, 2016 at 19:44 | #8

    Myron Martin :
    It really amazes me how many people engage themselves in “rearranging the deck chairs on the Titanic while totally IGNORING the causes of WHY the ship of state is going under.
    The fundamental problem is totally swept under the rug. The downward spiral began with passing of the Federal Reserve Act of 1913 which gave the International Banking Families like the Rothschilds and Rockefellers and their cronies a MONOPOLY on in effect legalizing what amounts to COUNTERFEIT money requiring the payment of interest in perpetuity. Banker propaganda has the masses falsely believing that bankers merely act as lender-borrower go-betweens for a small fee!
    They perpetuate the fiction that bankers make their money on the small difference between the paltry interest they pay depositors and the higher interest they charge for loans to borrowers needing capital to build companies and create jobs, plus of course consumer lending that creates new successive bubbles in real estate, student loan debt and now sub par car loans to get more people to buy new cars they can’t afford on conventional terms.. The outright lie is that they retain 10% of deposits as RESERVES and loan out the other 90% at a higher rate thereby earning a profit.
    NOTHING COULD BE FURTHER FROM THE TRUTH, no wonder Henry Ford once stated that if the masses truly understood how fractional reserve banking really works there would be a revolution in the morning with riots in the streets, or words to that effect.
    The only politician that has really been willing to stand up against this banker scam is former Congressman Ron Paul and the few who, based on his heroic efforts over decades have supported bills to abolish the FED and return to honest constitutional money with intrinsic value. The U.S. is the king pin here, essentially all nations have followed the U.S. blueprint of debt based Central Banking. As long as our needed currency supply, (essential to facilitate trade) needs to be borrowed into existence as DEBT no amount of tinkering, interest rate manipulation and jaw boning by politicians will save us from drowning in debt.
    The facts were well stated by an honest Canadian Central Banker (almost ab oxymoron) when Graham Towers in 1939 stated in sworn testimony before a Parliamentary Banking Committee that,’every Bank Loan is a NEW creation of money, and when it is paid back it ceases to exist” so what naturally follows from that, since the interest is never created, (only the original principle) there must be a constant increase in total loans contracted that not only replaces old loans paid back, but also the accumulated interest. It should be obvious from this that it is a recipe for PERPETUAL DEBT that grows from generation to generation.
    This Ponzi scheme is now in its final stages before a TOTAL COLLAPSE as even at nominal interest rates the debt can no longer be serviced. We need a RESET, a biblical Jubilee where all debts are wiped out and we have a new beginning with honest constitutional money that holds its value rather than being constantly eroded by inflation. The insane part is that the imbeciles or con artists, take your pick, who control this FRAUD are striving for even more inflation and bigger doses of what has already been proven NOT to work with more “extend and pretend” tactics like negative interest rates and “helicopter money” that has reduced our once strong dollar from a defined value of specific grams of gold or silver with intrinsic value to a pitiful 2-3 cents in purchasing power depending on whose statistics you trust.
    Bankers and the politicians whose candidacy they finance (the proverbial one percent) are the only ones benefiting from the present crony capitalism practiced to-day which is why Donald Trump is perceived to be such a threat to the entrenched establishment which is why they support Hilary Clinton because they know she can be bought and will cater to any special interests if they donate enough to the Clinton Foundation.
    NEVER believe anything politicians say, just what they actually DO!. The record of BOTH old line parties is pretty pathetic. No matter who has been in power,the fact remains that BOTH have contributed to the growth of a pyramid of debt that can never be repaid in sound money as long as we allow International Bankers to impose their debt creating Central Banking fractional reserve fiat system on dumbed down voters by promising the moon with no plan for payment.

  9. Ken Pearce
    September 3rd, 2016 at 08:41 | #9

    Thank you gentlemen for your honesty and integrity. I was brought up the same way as yourselves .

  10. December 29th, 2016 at 09:18 | #10

    @Robert in Vancouver
    I suspect that will change very soon after Obama is no longer the president.

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