The price of crude for the residents within OPEC states is lower than the export price. As these states are mostly dictatorships, it is one way to placate the ruled. But it seems that the low prices provides the residents no incentive to be frugal. In the last decade, Saudi Arabia internal use has nearly doubled. According to Reuters:
”Consumption has trebled in Angola, doubled in Ecuador and climbed 55 percent in Venezuela. OPEC members also seem to be becoming less efficient. Oil usage per head is up 24 percent since 2000, Deutsche (Bank) says, while it is flat for the globe as a whole.
For importers, the uneven treatment is costly. The wasteful consumption in exporting countries reduces the supply available for the global market, presumably pushing up the price. It also cuts into the potential reserve capacity, making the price more volatile.
But OPEC members don’t really gain, either. Governments lose potential export revenue and state-owned oil producers lose potential income. In 2010, the opportunity cost of discount domestic pricing was roughly 15 percent of OPEC’s total oil export revenue of $770 billion, according to International Energy Agency calculations. Such largesse adds to the fiscal strain on many of these nations – contributing to the exporters’ hunger for ever higher global oil prices.”
I am not sure that this analysis as it is presented is consistent. First it says that the practice of diverting some fuel to internal use reduces the available supply and results in “pushing up oil prices”. Ok, that makes some sense. However the next paragraph seems to say that the practice causes them strain contributing to the exporters hunger for ever higher global oil prices.
What does that mean? If they had more crude to export they would have more revenue? But the artificial shortage that OPEC creates is done to get as high global oil prices as they can. Maybe the author of this analysis saying that OPEC would get all the revenue it wants if it could export more by using less at home. This presumably would allow the exporters to lower the price because they would not need the revenue. I doubt that.
Well, I probably have spent far too much time on this. Especially, since OPEC will continue to lower the price of crude. OPEC knows that there is a lot of untapped crude out there in the world. Much of it becomes economic to produce as the price of OPEC crude goes up. I have heard that North Dakota Bakken tight oil needs a price of around $75 per barrel to justify production. OPEC has lowered world crude prices before to slow down/stop bringing in new supplies of crude. They will do it again. They dread the slogan “drill baby drill” about as much as the liberal Democrats do.
To read more of the Reuter’s posting, click here.