O
PEC, which is the cartel of the 14 major oil producers, has recently adopted a policy that is bound to change all future political, strategic and economic equilibria.

With a view to contributing to support the oil barrel price, the Vienna-based organization of the major Middle East oil producers has agreed to accept a very considerable output reduction, together with the Russian Federation and other countries, which is worth at least fewer 1.8 million oil barrels per day.

Also all the non-OPEC oil producing countries, as well as Russia, shall follow suit and play along, otherwise the six-month agreement - which can be renewed indefinitely - will have no value.

Obviously Russia plans to reduce its oil output and it is worth recalling that, in 2014, it was exactly the excess of Russian and North American oil supply to bring down the cost of crude oil below $ 100.

Currently, after Russia’s victory in Syria, it is precisely geopolitics which is knocking on the door of those who manage oil prices.

Russia wants to resume its growth pathway and recover the costs of the war in Syria and of its future power projection onto the Middle East.

The Sunni and the Shiite world want either to grow and diversify or recover from the long season of international sanctions - as is the case for Iran.

It is worth noting that the non-OPEC producers or, better, oil extractors, are Canada, Mexico, the United States,   Bahrain - where only 8% of its GDP is generated by oil and gas, although it is a great centre of Islamic finance and aluminium production - Oman and, in Asia, China, Kazakhstan and obviously the Russian Federation, as well as, in Europe, Norway.

Saudi Arabia will account for approximately 50% of the expected total reduction in oil production, that is 486,000 out of the 10 millions produced every day.

Iran, which is very tried by sanctions, accepts the reduction which is implicit in the agreement between Russia and Saudi Arabia, but drops from 3.975 million barrels per day to 3.797.

OPEC will cut production by 1.2 million barrels per day, thus reaching 32.5 at the end of January 2017.

If the cut had not been made, the oil price per barrel would have fallen below 30 dollars, but currently the most reliable analysts estimate that oil prices may grow from 50/65 US dollars up to 70.

The higher cost of crude oil is quickly reflected in all related prices, thus favouring the start of inflation that many people - again with some naivety - are waiting in Western economies.

Incidentally, Russia does not trust much of OPEC promises but, together with other countries such as Kuwait, Algeria and Venezuela (all OPEC members), Oman (non-OPEC member), and Russia, it manages the "Review Committee on the evaluation of production agreements". As a result of the agreements, also Russia has cut production by 100,000 barrels per day.

In this regard, it is also worth recalling that the agreement between OPEC and non-OPEC countries would enable the US shale oil producers to stabilize production or even to increase it.

At strictly technical level, Iran participates in the operation only considering the strategic situation in the Greater Middle East, while it would even need to increase its oil supply by at least one million barrels per day so as to regain its position and recover from the long period of sanctions.

However, as also the Iranian authorities know all too well, the country’s oil production is even on the wane, from 3.85 to 3.60 barrels per day.

After the end of the embargo, the Iranian ayatollahs have succeeded in increasing production only from 2.8 to 3.8 million barrels per day, but the problem is that, in such a market, the increase in supply immediately depresses the oil barrel price.

In fact, operators naively expected an unlimited oil flow from Iran which, however, failed to increase production and, indeed, OPEC itself has recently recorded a drop in the oil extracted by Iran from 3.85 to 3.60 million barrels a day, a clear sign of damage to the extraction system and of technological obsolescence - problems which cannot certainly be solved in a day.

The booming prices, caused by a substantial oil barrel market manipulation, will also benefit the Iranian Shiites, without diminishing Saudi Arabia’s economic and military chances.

At qualitative level, which is not a secondary aspect in these situations, the production of light and sweet crude oil typical of US oil fields has not much favoured the recent excess of production, unlike the OPEC sulphurous and medium-quality oil.

In recent years, the OPEC increase in oil production has originated over 50% of its excess supply exactly from Saudi Arabia and Iraq, namely 1.5 million oil barrels a day, while shale oil - which is the main enemy of the Vienna-based cartel - has decreased by over 500,000 barrels a day, considering that it is more sensitive than other sectors to the profitability guaranteed by its high price.

It is equally true that currently the increase in the oil barrel price favours even the US and Canadian shale oil, which becomes economically viable only above 60 US dollars per barrel. Some analysts even maintain that currently 60% of the remaining world oil production is precisely in the US shale oil sector, whose companies should gain a competitive advantage over the next five years.

Furthermore, it is worth noting that in recent years the production cost of the US oil barrel has dropped by 30-40%, while it has declined by only 20% in the OPEC area.

Hence, paradoxically, a clearly anti-American geoeconomic choice becomes an asset for the new US economy - halfway between oil and domestic manufacturing companies - according to Donald J. Trump’s designs.

Moreover, currently Saudi Arabia has reached its maximum production level, but it may have technological capabilities to increase it by 25% for a short lapse of time.

Today, after the agreement between OPEC and non-OPEC countries, the Brent futures maturing in February 2017 have temporarily exceeded 57 US dollars - a rise by over 5% compared to the closing of last Friday.

According to Merrill Lynch, the agreement between the two groups of oil producers - an agreement that Russia has developed for years (and it is worth recalling Putin's statements in favour of Russia’s becoming an OPEC member) - will make the oil barrel price rise to 70 dollars by mid-2017.

Hence speculative capital will come back on oil markets, thus temporarily abandoning the other alternatives: non-oil commodities, currencies, gold and precious metals, as well as many government bonds.

Behold, Italy shall recalibrate its supply of public debt securities. It will not be an easy task.

Nothing, however, is yet decided and stable.

In fact, you may recall the underground war against OPEC waged by Kuwait in 1985, when the OPEC countries reported much larger oil reserves than the real ones because this boosted their production quota.

In principle, the OPEC reserves are supposed to be only 0.8 billion barrels as against the 1.3 billion barrels reported by the Vienna-based cartel.

In general terms, all OPEC official oil reserves could be larger than the actual ones by over one third.

Not to mention the fact that the real data on Saudi oil and gas reserves is still a state secret in the country.

Therefore the current OPEC's policy line is to attract in the cartel, at least indirectly, all the external oil production, by marginally favouring even the US and Canadian production, which had been the target of the long bearish fight of Middle East oil countries.

The geopolitical effects are before us to be seen: much of the Middle East is united in adhering to the Russian strategies, while the United States - not to mention the ludicrous EU - are left at the starting post.

Egypt will receive one million Iraqi oil barrels a day, at a much lower price than Saudi Arabia’s, which had been initially promised to Al Sisi in the framework agreement envisaging 23 billion US dollars of aid on a yearly-basis.

Saudi Arabia did not implement the agreement with Egypt so as to punish it for its participation in the Russian-Alawite system in Syria.

Al Sisi has even reopened the hidden channels with the Lebanese Hezb'ollah and will contribute to the construction of an oil pipeline from Iraq to Egypt through Jordan - not to mention the fact that Egypt is already training four Iraqi army units for anti-terrorist operations.

Moreover, Egypt is fighting actively against the "Islamic State" in Libya, and especially in the Sinai region, and Daesh can now hit Egypt from its bases in Southern Libya.

Hence Al Sisi has envisaged to strengthen his ties with Algeria, which has similar problems.

In fact, this is exactly where the new oil proceeds will be channelled. They will be used to defend the extreme lines against the jihad – hence Egypt, Jordan, Iraq and Syria.

They will also be used to stabilize the situation in Syria and the increase in crude oil price will also fund the modernization and diversification of the Russian economy.

Europeans will not jump on the bandwagon and, like the kids living in the outskirts, will remain in the railway stations to watch the trains leaving.

Giancarlo Elia Valori

Advisory Board Co-chair Honoris Causa

Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York.

He currently chairs "La Centrale Finanziaria Generale Spa", he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group and member of the Ayan-Holding Board.

In 1992 he was appointed Officier de la Légion d'Honneur de la République Francaise, with this motivation: "A man who can see across borders to understand the world” and in 2002 he received the title of "Honorable" of the Académie des Sciences de l'Institut de France

 

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