Is OPEC Its Own Worst Enemy?

There's a growing rift among the nations within OPEC. Just this past week the Nigerian oil minister, Diezani Alison-Madueke, said that OPEC could need to call an emergency meeting to discuss the persistently low price of oil. However, another member quickly piped up and said there was no need for an emergency meeting.

Nigeria's desire for a meeting comes just a month after Venezuela's president went on an around the world trip to meet with fellow OPEC members as its financial situation grows dire.What's becoming increasingly clear is that OPEC is at war not just with U.S. and Russian oil companies, but it is also battling a war within.

OPEC conference room in Vienna. Source:Flickr user Osbornb.

OPEC to the rescue?As it stands right now OPEC is next due to meet this June as part of its bi-annual schedule. However, several of its members would like to meet much sooner than that, including Nigeria's oil minister. She is currently the president of the cartel and is responsible for liaising with members and the group's secretary-general in the event it does call an emergency meeting.

She told the Financial Times this week that if the oil price, "slips any further it is highly likely I will have to call an extraordinary meeting of OPEC in the next six weeks or so." She then went on to say that "we're already talking with member countries."

Her country, which is the largest oil producer in Africa, is feeling the pain of the crude oil price crash. That oil fuels 80% of Nigeria's government revenue as well as much of its economy, which is in turmoil due to the turbulent oil market. The country recently slashed its growth forecast from 5.5% to 4.5%-4.8% and its central bank has spent a billion dollars to help shore up its rapidly depreciating currency.

This same pain can be felt across many of OPEC's members. Venezuela, for example, is struggling to stay afloat as its country's finances and economy are in shambles. It's economy has contracted 7% and inflation is spiraling out of control as it's up 70% in the past year. This has put the country on edge as angry citizens protest the deteriorating conditions of the nation as many don't have access to basic goods like toilet paper, baby formula, or shampoo. In fact, just this week neighboring Trinidad & Tobago offered to trade tissue paper and other basic items for oil in order to provide the cash-strapped Venezuela with things its citizens desperately need.

Source:Flickr user Day Donaldson.

One nation stands in the wayBoth Nigeria and Venezuela would vote for an OPEC production cut in a heartbeat. The problem, however, is their vote isn't the one that matters. That's because Saudi Arabia has defacto control over the group as it produces a third of OPEC's oil. Its finances are in great shape, despite the fact that plunging crude oil prices are expected to blow a $38.6 billion hole in its government budget this year. The difference between the Saudis and most of the rest of OPEC's members is the fact that it has a massive foreign currency reserve that stands at $736 billion. It's a reserve that it built during the glory days of crude prices and one that it plans to live off of during lean times like it's seeing right now.

The Saudis have gone on record to say that they have no problem dipping into their reserves for a few years. In fact, with an entire fiscal budget of only around $230 billion a year, it has enough in reserve to survive several years at rock bottom oil prices. Because of this it wants nothing to do with a production cut as an OPEC production cut really means a Saudi production cut. Instead, the Saudis want to see non-OPEC producers cut production, which is starting to happen.

U.S. oil companies in particular are quickly waking up to the fact that it's disadvantageous to grow oil production in an already saturated oil market. This is why many shale-focused oil producers have slashed spending by 50% or more in response to weak oil prices. These spending cuts are not only slowing production growth, but in some cases producers have decided not to pursue production growth in 2015. For example, EOG Resources , which is one of the leaders in shale oil production growth in recent years, decided that it won't grow its oil production in 2015 unless the price of oil improves. That's a huge reversal from previous years when it was delivering best-in-class oil production growth of more than 30% per year. Meanwhile, other producers expect production to peak in the first half of the year before giving way to declines later in the year.

Investor takeaway OPEC's goal was to cause non-OPEC members to slow down growth. It's a goal that is starting to come to fruition as U.S. producers have clearly backed away from their ambitious growth plans. However, this has come at a great cost to many of OPEC's members as some are really suffering from the weakness in the oil price and are demanding that the group come to their rescue to stop their pain. The problem is that if OPEC does give in, then it could give non-member rivals the incentive to restart growth, which would mean all of this pain was for nothing. Suffice it to say, this battle appears far from over.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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