OPEC’s Output Cut Is Rotting from Within

OPEC is committed to, along with a group of petrostates outside of the cartel, cutting its collective production through March of next year in an attempt to help reduce the oversupply that’s weighed on global crude prices in recent years. But even after this coalition of oil producing states recommitted itself to this strategy earlier this month, prices continued to fall. Today, they sit at just above $45 per barrel, far below where OPEC would like it to be. As the New York Times reports, Libya bears a lot of responsibility for this:

[The] biggest wild card in the [market] equation — one that could tip prices at the pump from one day to the next — is oil-rich Libya, among the most unstable countries in North Africa. Contrary to the predictions of almost all experts, Libya’s production has climbed a wall of crisis in recent months to 885,000 barrels a day last week, roughly triple its production of only a year ago. […]

Libya’s success in the oil fields has been highly improbable at a time when the country is hopelessly divided between two competing governments and several hostile tribal and regional militias. Deals are made from week to week between oil officials and tribal groups seeking leverage in the southern desert just to keep pipelines open. And suddenly the tensions between Qatar and its Middle Eastern neighbors are echoing more strongly in Libya, threatening exports.

But the seemingly ungovernable country has already undermined OPEC’s efforts to cut production, and now Libyan oil executives are projecting that their production will reach a million barrels a day by the end of July, a level not seen in four years.

Before the 2011 uprising, Libya was producing 1.6 million barrels of oil per day (bpd). Today the country is far from those numbers, but it’s making progress towards topping 1 million bpd once again—back in April, it was producing around 700,000 bpd, while today it’s pumping 885,000 bpd. That’s a significant difference, when you consider that the coalition of petrostates have targeted 1.8 million bpd as their reduction target. Libya was excluded from OPEC’s part in these cuts—a natural exemption, given the country’s recent struggles—but its surprising resurgence is still a major headache for the cartel, and it’s undermining cuts to a degree that few expected.

That’s why, even as OPEC pursues cuts, its production is growing. That’s also why oil prices recently hit a seven month low. It’s a bad time to be a petrostate.

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