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‘Global economy will benefit from oil price decline’

‘Global economy will benefit from oil price decline’
If OPEC fails to take a unified approach on stabilizing oil prices the global economy will be the biggest winner because oil prices will continue to fall, Fred Beach, of the University of Texas at Austin, told RT.

The next OPEC meeting will be held on November 27 in Vienna. The member countries are going to discuss stabilization of oil global price, and look for ways to stem a further decline.

RT:There have been multiple reports that OPEC (Organization of the Petroleum Exporting Countries) won't cut production to stabilize prices which is common practice in such a situation. Why is that?

Fred Beach: I think it is a rather complex situation. First of all, Saudi Arabia being an independent producer doesn’t always link its production to supply and demand that other OPEC countries want to do. That is why there is so much focus on the upcoming OPEC meeting to see if the organization as a whole comes to an agreement to either cut production to stabilize prices or if the independent countries want to go their own way.

RT:If OPEC fails to act, how will this affect the group's global influence on energy markets?

FB: If OPEC fails to take a unified approach to this the price will continue to decline. The real question is how far down will they go. At some point even more of the OPEC countries will be affected by the reduced prices. Saudi Arabia is fairly well understood to be one of the lowest cost producers. They can understandably effect and absorb the lower price required for some time. I think the real winners and losers in this situation is more from a global perspective. I think the global economy will be the biggest winner- and will sustain the lower prices for some time. Many people feel the global recession was really triggered by the rise in oil prices back in 2000-2008. Some of the slow growth or stagnant growth in the global economy is because the prices stayed so high for so long.

RT:Even if OPEC agrees to a cut in production. Will it be enough to halt the slide in prices? How long can this slump continue?

FB: First of all, even OPEC may not be enough to alter the price decline too much. Even if they do OPEC has historically had a hard time keeping their agreements. Usually somebody within OPEC cheats on wherever the agreement is fairly rapidly and the others follow. I think what we are seeing is readjustment in the global price. That is probably has been a long time coming. We have been in the $100 a barrel range for several years now which many analysts have agreed is probably too high, and certainly too high for the global economy. It is just a matter of where we will see the bottom this time. And we dropped it at $45-50 a barrel back in 2009 briefly. We are seeing a similar rapid decline now. The only certainty is how far the bottom before it balances back up … $60, 70, 80 range, and where that new normalized price will be?

Reuters/Hamad I Mohammed

RT:There have been many theories surrounding the fall in oil prices. One of them is that a global oil war is underway with the United States and Saudi Arabia on one side against Russia and Iran on the other. Is there any truth to this?

FB: That is a great and interesting theory. It has obviously got a lot of press. I don’t think there can be really a lot of truth behind it. The reduction in oil price that we are seeing right now obviously will hurt the Russian economy. But it is going to hurt the US economy, at least at the oil and gas field, as well, and other economies around the world as far as the petroleum producing regions. So many, many countries are going to be affected by this slump in prices, not just the Russians. This is one of those things that are going to affect a lot of people in a bad way. It is really a matter of time to see who it affects the worst. Obviously those will be the highest cost producing nations that will be affected the most. But I don’t believe in the grand conspiracy theory. I don’t think there are any governments closely related enough to be able to pull that off.

RT:Another theory is that Saudi Arabia has allowed the oil price to fall to drive down production by US shale companies. And there are reports that US shale companies have cut back on their investment programs. Does it mean the strategy is paying off?

FB: Saudi Arabia aggressively allowing the price to fall. There is maybe some truth to that. But they certainly haven’t ramped back their own production to try to stop the fall. But there is a good question at either reducing their production would be enough to do that. As far as they have been actively allowing the prices to fall in effect to hurt US production, I don’t think so. If anything they would be more focused on maintaining their market share in the US market in competition with other importers to the US. It is going to be hard to compete with US domestic petroleum production because it is a domestic production. And plus the production we have in place right now in the US is pretty profitable. Even down the $50-60 barrel range. I think the real effect will be in long term exploration which has a rather delayed effect. If we stay in the $60-70 range for too long I could see a significant roll back in exploration for new production and that will have a delayed affect in our production further on down the road perhaps in a year or two.

RT:How does the arrival of cheap oil produced by the Islamic state affect the market?

FB: That is pretty much inconsequential. The volume is so, so small that I can’t say that is having any real play in this at all.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.