Bad News For Spain: Oil Prices Over $50 bpd

OPEC cut to impact Spanish economyOPEC cut to impact Spanish economy

OPEC’s first cut in production in eight years is not good news for the Spanish economy. The price of a barrel of Brent oil shot up over 8%, breaking the psychological barrier of $50, after the organisation announced the agreement to limit output to 32.5 million bpd, 1.3 million less than is currently produced.

Spain, which imports almost all the oil it consumes, has benefited enormously from the slump in the price of a barrel of this “black gold” which, let’s remember, was over $100 just a little over two years ago. It’s estimated that every 10% drop in the price of oil allows for one-tenth of a percentage point improvement in Spanish GDP (1 billion euros). And the reverse is true when the price increases.

In any event, the rise in crude prices might be fairly contained. Analysts believe that, despite this cut in production, the price of a barrel of oil will oscilate between $50 and $55 in the coming months, and will not get to $60 until end-2018.

The likelihood of a bigger rise is slight, amongst other reasons because two out of every three barrels of oil are produced outside OPEC, which limits its capacity for influencing global supply.

Now everyone is waiting to see how the US will respond. It is the world’s top oil producer thanks to ‘fracking’. Observers believe that US shale oil producers have the capacity to compensate for OPEC’s production cut very quickly.

The power of this formula for extracting crude was behind the price war which led to an over 80% slump in prices between June 2014 and January 2016.

The aim of the conventional producing countries, led by Saudi Arabia, was to lower prices to suffocate operators with higher operating costs. However, after the fall in shale oil production from its highs at the start of 2015, levels have stabilised in the last few months. This shows how quickly they have adapted to the new situation.

*Image: Flickr

About the Author

Francisco López
Working for more than 25 years in the world of journalism and communications, Francisco has gained valuable experience at several well-known newspapers such as El Mundo and La Vanguardia. He specialized in economic and financial news before making the leap to the corporate communication sector where he has held several positions: Adviser to the Ministry of Economy, Director of the Bank of Spain’s Communication Department, in addition to his consultancy role at Analistas Financieros Internacionales, where he currently works.