Oil prices, OPEC, and the future of energy [Recharge]

By letting oil prices slide and maintaining market share, OPEC is playing a risky game of chicken that will take years to play out. 

Nabil al-Jurani/AP/File
Oil personnel work at the Rumaila oil refinery, near the city of Basra, Iraq. Oil prices are down some 40 percent since their year-high in June.

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Oil prices dropped to five year lows Monday as weak demand in Europe and China added to downward pressure from last week's meeting of the Organization of Petroleum Exporting Countries. Brent crude oil prices fell as low as $67.53 Monday, its lowest since 2009, before rebounding to $69.80.

OPEC’s decision to maintain output last week was yet another sign “that we have begun a new chapter in the history of the oil markets," in IEA's words.

By letting prices slide and maintaining market share, Saudi Arabia is playing a risky game of chicken that will take years to play out. Once before, OPEC’s de facto leader successfully used the gambit to force the cartel’s members to cut production. This time, however, it faces a much larger contingent of players, including the United States, Canada, and Russia, which represent a much bigger slice of global production and are far less likely to be intimidated.

OPEC also faces a global economy looking for ways to use oil more efficiently – or not use it at all. Highly efficient engines and alternative fuels – combined with climate policy taking root in energy-hungry economies, and a curtailing of fuel subsidies across East and Southeast Asia – will slow a return to robust oil demand. Energy demand will continue to rise, but there's no guarantee it will come in the form of oil.

The continued plunge in prices is a geopolitical win for Europe and the US. Petro states Russia and Iran are among those most squeezed by depressed prices, giving the West an edge when it comes to nuclear talks with Iran, and confrontations with Russia over the Ukraine crisis.

Ultimately, OPEC has no easy option. If it lets prices fall, it might slow the existential threat flowing from North Dakota oil wells, but it exacerbates an already dire economic outlook for some of its most vulnerable members. Propping prices back up might ease some intra-OPEC tensions, but it would lose valuable Asian customers, and give US producers a reason to keep drilling.

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