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posted on 27 December 2015

OPEC Likely To Keep Pumping Despite Budget Woes Of Some Members

from the Dallas Fed

-- this post authored by Martin Stuermer and Navi Dhaliwal

The Organization of the Petroleum Exporting Countries (OPEC) abandoned its traditional role of cutting production to keep the world oil market in balance in November 2014. Faced with declining oil prices and falling market share, the cartel decided to keep on pumping rather than cut supply.

The cartel's declared goal was to squeeze competitors that had higher production costs, such as those in U.S. shale plays. Prices have fallen since then, hurting producers in Texas and the U.S. that have trimmed rig counts and reduced employment.

OPEC's strategy has also come at a cost to its members. Most are highly dependent on oil and gas sector revenues to finance their government budgets, and low oil prices have led to substantial deficits. OPEC countries' average fiscal balance - the difference between revenues and expenditures, expressed as a share of gross domestic product (GDP) - reversed from a surplus of more than 5 percent of GDP in 2012 to a deficit exceeding 10 percent of GDP in 2015 (Chart 1). The shortfall raises the question of how long OPEC countries can sustain deficits if oil prices stay low. Could this deterioration in fiscal balance prompt the cartel to reverse course?

[click on image below to continue reading]

Source: http://www.dallasfed.org/assets/documents/research/ swe/2015/swe1504g.pdf

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