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Bracing for OPEC cutback

Published: 02 Oct. 2016, 20:33

Subdued oil prices that have depressed the global economy received upward momentum after the Organization of the Petroleum Exporting Countries (OPEC) finally decided to cut collective crude output for the first time in eight years. Soft oil prices have dented not only oil-producing majors but also sparked deflationary pressure across the world and hampered recovery in the global economy.

The 14 members of OPEC delivered a surprising decision to scale back total output by 740,000 barrels a day, cutting daily turnout from the current 33.24 million barrels to 32.5 million. The quota for each producing nation will be decided at a general conference in November.

Traditional oil-producing nations have been stuck in a game of chicken with high-cost American shale oil producers since 2014, flooding the market in an attempt to push out new players. Saudi Arabia, the leader of the oil cartel, led the price war by keeping up their money-losing output against cheaper onshore crude production.

But the lengthy battle took its toll on traditional players more than on newcomers. The plunge in oil revenue did not just kick out U.S. players but also wreaked havoc on the fiscal state of countries relying on oil from Saudi Arabia, which has been sitting on a record deficit after Dubai crude prices plunged from $100 in mid-2014 to $29 in February.

Oil price developments have big repercussions on the global economy. Lows in oil prices, interest rates and the U.S. dollar from 1986 to 1988 were a boon for the global economy, but the three lows in the present day have instead pushed the global economy further into a slump.

The Korean government recently announced that the petrochemical industry is in need of streamlining. The poor economy in the Middle East has hurt construction companies and offshore facilities manufacturers. The rebound in oil prices could raise costs in airlines and shipping industries, but many believe the spike in prices could be limited.

The OPEC nations still need to iron out details on its scale-down plan. Since their interests differ, they may not be able to reach a conclusion in the November meeting. Their cutback could cause the U.S. shale industry to resume full-scale production after it was reduced by the fall in oil prices.

Experts do not believe crude prices can recover to above $50. The developments could pose as both a risk and an opportunity for Korean companies. Local enterprises must come up with good contingency plans.

JoongAng Ilbo, Sept. 30, Page 26