A huge decline in the price of oil is seriously affecting the economy of the oil producing nations.
Almost their entire GDP is based on oil.
What can OPEC do to reverse this slide in oil prices?
The last time this occurred OPEC’s solution was to decease oil production in hopes that higher oil prices would return.
In fact what happened was a renewed search for new oil sources which proved surprisingly successful thus keeping oil prices depressed. They realize now that that tactic did not work and are scrambling for alternatives this time. One alternative is to do nothing. OPEC oil is cheap to produce whereas, for example, our shale oil is quite costly, Depressed oil prices will eventually cause a reduction of our shale oil operations causing oil prices to rise.
However there is another quite unexpected factor that will tend to keep oil prices down.
It appears that Iran, formerly a major oil producing nation, which has been virtually shut down due to sanctions will be back on stream in the near future.
Iran is so desperate for this income that they will pump oil regardless of the price.
OPEC nations have spent much of their oil profits on handouts to their retinue of officials, relatives and princes; on magnificent structures; on highways and hotels for the ultra rich and they have kept the masses at bay with sufficient social amenities to maintain calm.
Most of these nations do have substantial Sovereign Funds, which are now being rapidly depleted propping up their economies.
Thus oil prices should remain low for many years.
Norway is one oil-producing nation that has bucked the trend to splurge.
Currently Norway has the largest Sovereign Fun in the world amounting to nearly $1 trillion (yes trillion) .
Only 4 percent of annual oil profits go into government coffers the remaining is placed in their Sovereign Fund. (And even this small percentage is to be reduced next year).
Due to this approach the Norwegian economy is relatively unaffected by low oil prices because their economy is not propped up by oil revenues.
They realized that pumping large amounts of money into the economy would have serious consequences.
Initially inflation accompanied by reduced worldwide competitiveness.
When the oil runs out they would not be prepared to compete in the world economy.
Best to invest oil profits for the day when their oil fields run dry they concluded.
Theodore Theodorsen
Manhasset
