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OPEC Needs Higher Oil Prices To Finance Governments

Falling oil prices are making it harder for OPEC member states to fund their governments. Oil prices hovering around $70 per barrel is too low for most OPEC countries to cover their budgets, according to Reuters data.

While OPEC countries generally have lower costs of actually getting oil out of the ground, than the western countries, they use that oil revenue to fund their government budgets and provide benefits to their citizens. These costs add up, meaning that OPEC members need high oil prices — usually above $90 per barrel — to keep their budgets in the black.

“The weighted average of oil prices collected by members of the Organization of the Petroleum Exporting Countries was $106 a barrel last year – just enough to cover the average budget requirements,” according to Reuters analysts.

“The budget needs of oil producers are generally much higher than their marginal operating costs, calculated as the cost of producing one extra barrel of crude oil from an existing field,” Reuters noted.

In August, when the average price OPEC charged for oil was $100.88 per barrel, seven OPEC members needed higher oil prices to buoy their budgets, including Algeria, Ecuador, Iran, Iraq, Libya, Nigeria and Venezuela.

But now with the average OPEC oil sale price at $68.13 even countries like Saudi Arabia, the United Arab Emirates and Angola are below what they need to fund their governments based on what their 2013 needs compiled by Reuters.

In 2013, Saudi Arabia needed $92 per barrel to pad their budget, the UAE needed $90 per barrel and Angola needed $94 per barrel to stay in the black.

Despite the massive price decline, however, OPEC has opted not to cut production levels to boost oil prices. The move shook markets and drove oil prices down even further. Energy experts have been speculating about what it means.

Some argue that OPEC is willing to watch oil prices collapse in order to force U.S. oil companies to cut production and curb investment plans they have for extracting more oil from shale formations.

But U.S. oil companies to do not have to worry about providing for a whole country and can make do with much lower prices for oil. Companies have also said technology for extracting shale oil and gas is getting better and cheaper.

“Production is going to continue to grow,” said Edward Morse, head of commodities research at Citigroup. “Could we see another million barrels a day of growth next year over this year? We happen to think so.”

Morse says that even if oil prices average below $80 per barrel next year, he expects U.S. oil produces to add 800,000 barrels per day.

“No matter how low oil prices go, there will be no (shale) production shut in,” Fadel Gheit, energy analyst at Oppenheimer, told CNBC. “The cash component (cost) will be, say, $15, $20, $25.”

“Oil prices will have to go below $30 for some of these wells to be shut in, and even then the owners need the cash to survive. They will milk the cow until the cow drops dead,” Gheit said.

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